JD Logistics (Part 1): Introducing JD Logistics

In our JD Logistics series, we explore JD Logistics (Chinese: 京东物流) (HKEX: 2618), e-commerce giant JD Group's logistics unit that was spun-off and listed on the Hong Kong Stock Exchange in May 2021. JD Logistics describes itself as China's leading technology-driven integrated supply chain logistics services provider which has served more than 300,000 corporate customers across different industries in 2021.


In Part 1 of this series, we introduce JD Logistics' business model and what the company coins "integrated supply chain logistics services". In Part 2 of the series, we examine JD Logistics' business and financial metrics, as well as discuss key factors and trends that are influential to the company's future.


JD Logistics Series

JD Logistics (Part 1): Introducing JD Logistics

JD Logistics (Part 2): Financials and Future


JD Series

JD (Part 1): Understanding JD

JD (Part 2): The Future of JD

 

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Corporate History

JD Logistics was founded as JD Group's in-house logistics department in 2007 to transport and deliver the company's relatively fragile, primarily 3C (computer, communications, and consumer electronics) goods to end consumers. As JD continued to develop its focus on providing fast delivery and superior service (see our JD series here), the Group launched its 211 program in 2010 which guaranteed same-day or next-day delivery for items available at a nearby distribution center. At the same time, JD also placed great emphasis on improving supply chain efficiency through big data analytics. Starting in 2012, the Group could successfully maintain its inventory turnover to be within 40 days in spite of its increasing number of stock-keeping units (SKUs).


In 2017, JD Logistics was recognized as a stand-alone business segment within JD Group, as the business also commenced serving external (i.e. non-JD) customers.


In 2018, JD Logistics began a spin-off process which ultimately culminated in its listing on the Hong Kong Stock Exchange (HKEX: 2618) in May 2021.


As of the time of writing, JD Group holds 63.46% of JD Logistics' shares.


The JD Logistics Network

JD Logistics comprises of six synergized and digitally integrated logistics networks:

  1. Warehouse Network

  2. Line-Haul Transportation Network

  3. Last-Mile Delivery Network

  4. Bulky Item Logistics Network

  5. Cold-Chain Logistics Network

  6. Cross-Border Logistics Network


Warehouse Network

JD Logistics' warehouse network is one of the largest in China with an aggregate gross floor area (GFA) of approximately 23 million square metres nationwide as of June 2021. The warehouse network is a critical component of the company's integrated supply chain logistics services and comprises of 1,200 self-operated warehouses and over 1,600 cloud warehouses operated by third-party owner-operators as part of the company's Open Warehouse Platform. The Platform was launched in 2017 as a way to export JD Logistics' warehouse management system and expertise to external clients.


JD Logistics' warehouse network is characterized by a high level of automation and strong technological capabilities that provide significant speed and accuracy improvements to traditional and typically more labour-intensive warehouse management methods.


Line-Haul Transportation Network

Line-haul transportation refers to the movement of goods from one station to another (typically from origin to destination), which usually takes place over long distances. JD Logistics' line-haul network consists of directly operated sorting centres and line-haul routes that connect the company's warehouses, sorting centres, and delivery stations.


As of June 2021, JD Logistics operates 210 sorting centres in China, over 1,000 air cargo routes, in addition to more than 300 railway routes (two-thirds of which are high-speed train routes) as part of a joint venture with China Railway Corporation, the country's national railroad operator. At the end of 2020, JD Logistics also had an in-house fleet of 7,500 trucks and other vehicles, while additional capacity needs are outsourced to third-party transportation service providers.


As is the case with the company's warehouse network, JD Logistics' sorting centres are highly automated for enhanced operating efficiency.


Last-Mile Delivery Network

JD Logistics' last-mile delivery network is the last node for all of the company's logistics networks to reach end consumers. The network comprises of delivery stations where delivery personnel are stationed at and start their to-door delivery services from, service stations that receive outbound packages and serve as pick-up stations for both JD Logistics and other courier companies, in addition to self-service lcokers located in high traffic areas close to end consumers that allow for 24/7 self-pickup.


As of June 2021, the last-mile delivery network consists of 7,800 delivery stations complemented by more than 200,000 delivery personnel, as well as 10,000 in-house and 280,000 partnered service stations and self-service lockers. The network covers 32 out of China's 34 provincial-level administrative regions.


Bulky Item Logistics Network

JD Logistics' bulky item logistics network provides an all-in-one integrated solution with regards to the transportation, delivery, assembly, and installation of home appliances and furniture, as well as other types of heavy load parcels weighing over 30kg. The network comprises of multi-level warehouses, door-to-door delivery, value-added installation, and after-sales service capabilities to target what the company believes to be an underserved market that has not received much attention from traditional logistics services providers (which typically focus only on the transportation and delivery aspects).


At the end of 2020, JD Logistics had 86 warehouses and 102 sorting facilities with automation technology suitable for bulky products that comprise an aggregate GFA of 2.8 million square metres across 74 cities in China.


Cold-Chain Logistics Network

As of June 2021, JD has more than 100 temperature-controlled cold storage warehouses designated for fresh, frozen, and refrigerated products with a total area of over 600,000 square metres, in addition to 23 warehouses designated for pharmaceutical products and medical instruments with a total area of 160,000 square metres.


Cross-Border Logistics Network

As of June 2021, JD has 50 bonded (i.e. designated for imported overseas goods being sold in China) and overseas warehouses covering a total GFA of more than 500,000 square metres, in addition to charter flight routes from China to Thailand and from China to the US.


Integrated Supply Chain Logistics Services

In this section, we explore the notion of integrated supply chain logistics services (as presented by JD Logistics), as well as discuss how this new form of logistics services differs from traditional "isolated" logistics services.


What Is Integrated Logistics Services?

JD Logistics defines integrated supply chain logistics services (as opposed to isolated supply chain logistics services) as a sub-segment of outsourced logistics services provided by a third-party services provider that possesses the competencies of providing a full spectrum of logistics services (including express delivery, transportation, last-mile delivery, warehousing, and other value-added services) offered to clients in the form of integrated solutions tailored to each client's specified needs.


The goal of integrated logistics services is to leverage advanced technology, big data analysis, and industry-specific insights to offer targeted supply chain solutions that can enhance operating efficiency for enterprise customers. In the context of JD Logistics, management believes that the company can generate value-added by helping clients to reduce redundant distribution layers, improve their supply chain agility, and optimize their inventory management in order to allow for superior customer experience and greater stickiness.


JD Logistics Flowchart
Example of JD Logistics' Solution Network (Source: Company Prospectus)

Note: reverse logistics refers to JD Logistics' handling of the return process where purchased products are returned from the end customer to the seller.


In-House vs. Outsourced Logistics

JD Logistics outsources certain components of the company's operational processes, including labour outsourcing for less critical or temporary (i.e. during peak season) positions, as well as transportation outsourcing to third-party transportation services providers for line-haul transportation and last-mile delivery. However, the company retains direct control of its (more technology-reliant) sorting centers and route planning processes.


How Do Integrated Logistics Services Providers Differ From Isolated Logistics Services Providers?


Integrated Providers Present One-Stop Solutions For Enterprise Customers

Isolated supply chain logistics services providers typically focus on providing only one specific logistics service (e.g. fast delivery). In contrast, integrated logistics services providers are able to provide one-stop solutions to meet a wide range of consumer demands throughout the entire supply chain process (e.g. ranging from inventory and warehouse management to delivery and assembly/installation services), thereby allowing enterprise customers to avoid having to engage multiple service providers.


Integrated Providers Utilize Industry-Specific Knowledge to Generate Client-Tailored Business Solutions

Integrated logistics services providers possess a deeper understanding of the nature of various industries, including the relevant end consumer needs and unique features that characterize each industry. This allows integrated logistics providers to offer tailored solutions that target various industry pain points. In contrast, isolated logistics services providers tend to be more industry agnostic in the sense that such companies offer a more limited scope of product offerings which usually do not take the enterprise customer's industry- and/or business-specific needs into account.


Integrated Providers Offer Non-Traditional Value-Added Services That Are Expected to Enhance Customer Stickiness

Integrated logistics services providers also offer additional valued-added services on top of the traditional services offered by isolated logistics providers, such as sales forecasting and production planning, stock-keeping unit (SKU) and inventory management, as well as end customer order management. JD Logistics believes such value-added services as well as the tailored solutions provided by integrated services providers will lead to stronger, stickier relationships between providers and customers in comparison to the analogous relationships between customers and isolated services providers where provider-switching is extremely common.


Clientele

Naturally, enterprises engaged in industries with higher requirements for logistics management are more likely to contract an integrated logistics services provider. During the 2018 to 2020 period, corporates in the fast-moving consumer goods (FMCG), home appliances and furniture, and computer, communication, and consumer electronics (3C) industries contributed to over 70% of JD Logistics' revenue from external (i.e. non-JD Group) integrated supply chain clients. FMCG clients alone contributed between 30% to 40% of JD Logistics' external integrated supply chain revenue each year during this period, while the company's services are also gaining traction among clients of other industries such fresh produce, apparel, and the automotive industry.


JD Logistics also has individual clients, although these constitute a very small minority in terms of revenue contribution.


JD Logistics in Action

Next, we present examples of JD Logistics' collaborations with various enterprise clients to illustrate how the company's business model works in action.


Example - Shaanxi Coal and Chemical Industry Group (陕西煤业化工集团)

JD Logistics collaborated with a subsidiary of Shaanxi Coal and Chemical Industry Group to facilitate the adoption of smart, automated equipment (e.g. unmanned automated guided vehicles and smart forklifts), as well as implement a warehouse control and management system whose algorithms were designed based on data mining and analysis. As a result, the subsidiary was able to achieve 100% automation of its material handling processes, improve space utilization, and raise storage capacity and overall operating efficiency.


Example - Nestle

JD Logistics collaborated with Nestle to optimize and streamline the company's supply chain by predicting regional demand using big data analysis and making the corresponding product allocations and distributions among different warehouses. As part of the contract agreement, Nestle has full visibility into their supply chain (e.g. quantities of goods available for sale, geographical locations of merchandise, remaining shelf-life, and traceable transportation routes), while also benefiting from the minimization of potential losses due to expiration.


Example - Skechers

JD Logistics collaborated with Skechers to re-design the company's warehouse network and product allocation system based on analyses of regional consumer demand and sales data. Initially, Skechers maintained independent warehouses for each merchandise category. However, as part of the collaboration with JD Logistics, Skechers's warehouse system was changed to a hub-and-spoke format with a central warehouse and omni-channel regional warehouses that stored mixed products based on predicted regional demand. As a result, Skechers's average fulfillment costs dropped by 11% and average delivery time reduced by five hours.


Other notable past and existing enterprise customers include Xiaomi Youpin, Amway, Volvo, Midea, and Tsingtao Beer.

 

Click here to subscribe and stay tuned for future updates!

 

JD Logistics Series

JD Logistics (Part 1): Introducing JD Logistics

JD Logistics (Part 2): Financials and Future


JD Series

JD (Part 1): Understanding JD

JD (Part 2): The Future of JD


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