04/16/2024
Critical Factors for a Successful Regional Distribution Strategy
Sustainability, competitiveness, CSRD obligations: the essentials for staying ahead in an ever-changing landscape.
In recent years, amidst the backdrop of geopolitical tensions, the COVID-19 pandemic, and the rise of emerging markets across the Asia Pacific region, there has been a notable surge in multinational corporations eyeing the establishment of their Regional Distribution Centers (RDCs) within ASEAN (The Association of Southeast Asian Nations). ASEAN, as a regional economic bloc comprising 10 member countries — Cambodia, Indonesia, Singapore, Thailand, Malaysia, the Philippines, Myanmar, Brunei Darussalam, Vietnam, and Laos PDR — boasts a collective population of approximately 680 million and a GDP of around € 3.34 trillion in 2022. Considered collectively, ASEAN stands as the third-largest economy in Asia and the fifth-largest globally, following the US, China, Japan, and Germany.
What Constitutes a Regional Distribution Center?
A Regional Distribution Center plays a pivotal role within a company's global and regional supply chain strategy, tasked with delivering top-tier service levels to omni-channel customers. Serving as a vital intermediary node, it facilitates the consolidation, warehousing, and distribution of goods from manufacturers to various destinations, including distributors, retailers, and end consumers. The key distinction between a regional DC and its local counterpart lies in its geographical scope; while a RDC spans multiple countries within a region, local DCs predominantly cater to individual country markets.
A research project*, supported by GEODIS and conducted by postgraduate scholars from TLI-AP (The Logistics Institute, Asia Pacific) at NUS (National University of Singapore), delved into identifying critical factors influencing the optimal location for setting up regional distribution operations. In this investigative study, logistics and supply chain executives across diverse industries — including electronics, cosmetics, logistics, chemicals, and pharmaceuticals — were interviewed to glean insights.
Critical Factors Influencing RDC Location Selection
Risk Exposure:
Mitigating risk exposure, encompassing factors such as geopolitical stability, exchange rate fluctuations, and socio-political unrest, emerged as a paramount concern among respondents.
Government Regulations:
The regulatory landscape of a prospective host country is also a critical factor , with considerations spanning corporate taxation, regulatory oversight, and governmental policies impacting industry operations.
Customs & Trade Regulations:
Streamlined customs procedures and transparent trade regulations emerged as imperatives for cost-effective and efficient RDC operations. Countries boasting robust FTAs and efficient customs frameworks garnered favor among businesses. Businesses also value the importance of private-public-partnership between the relevant customs authority and their respective industries, especially when it comes to the introduction of new customs policies.
Strategic Locational Advantage:
Factors such as proximity to key markets, supplier bases, market size, and resilience to natural disasters (such as typhoons, earthquakes, floods and volcanic eruptions) emerged as pivotal considerations guiding location choices.
Comparative Cost Advantage:
The cost of conducting business, encompassing labor, land, capital, and transportation expenses, weighed heavily in location assessments.
Labor Supply:
Adequate access to a skilled labor pool emerged as a crucial consideration, given the labor-intensive nature of logistics operations.
Prerequisites for Seamless Regional Distribution Operations
In addition to the aforementioned factors, operational-level considerations play a pivotal role in ensuring the smooth functioning of RDCs, particularly concerning customs control:
FTZ / Customs Bonded Warehouse: Optimal RDC operations often necessitates proximity to Free Trade Zones (FTZs) or customs-bonded warehouses, facilitating streamlined transshipment handling and regulatory compliance.
Electronic Customs Processing: Leveraging electronic customs submission and processing mechanisms alleviates administrative burdens and enhances operational efficiency, underscoring the importance of modernized customs frameworks. Countries that still rely on hardcopy paperwork and manual customs procedures will create huge administrative burdens and high operating costs for the RDC operator.
Back-to-Back Certificate of Origin: The issuance of back-to-back certificates of origin, facilitated by robust Free Trade Agreements, holds potential for substantial import duty savings for end customers, bolstering the appeal of RDCs.
Mutual Recognition Agreement of AEO: Collaboration among governments to establish Mutual Recognition Agreements (MRAs) for Authorized Economic Operators (AEOs) streamlines customs clearance processes, reducing inspection frequencies and expediting trade flows.
Research Insights and Recommendations
Drawing on research insights, Singapore and Malaysia emerge as prime contenders for RDC establishments within the Asia Pacific region. However, Singapore's high operational costs render it more suitable for handling high-value goods, such as aircraft parts, pharmaceutical products, hi-tech semiconductors, jewelry and luxury goods. With a population of over 278 million, Indonesia's vast domestic market makes it an attractive destination, while Thailand's strategic location and robust transportation networks offer compelling advantages. Vietnam, benefiting from its proximity to Chinese manufacturing hubs, also presents promising opportunities for relocation.
GEODIS: Your Trusted Partner in Customs & Trade Compliance
With the increasing challenges in global trade and geopolitical tensions, the cost of doing business in cross-border trade has risen tremendously over the years. It is therefore essential for all companies to regularly review their logistics and supply chain footprint, in order to identify any reconfiguration opportunities. Any supply chain network re-engineering study should be supported with full regulatory compliance in mind, as it is all too easy to focus too much on cost savings at the expense of trade compliance.
As the world’s leading customs brokerage service provider, GEODIS provides a full range of professional customs & foreign trade solutions to all our clients globally. We have more than 1200 professional trade experts worldwide to support our customers in researching customs and trade regulations, as well as providing effective cross-border digital customs solutions to ensure efficient and cost-effective management of inventories, cargo distribution, and duty & tax optimization with full customs compliance at all times.
