Success is often the result of a combination of factors. Haier, an outstanding representative of Chinese companies, can attribute its success to many factors, the most frequently mentioned being the company's reputation for quality, innovation, brand building and responsive customer service.
When discussing the reasons for Haier's success, corporate watchers like to talk about quality. Haier's CEO Zhang Ruimin once used a sledgehammer to smash a refrigerator that had just come off the assembly line - a move that shows that Haier cannot tolerate inferior products. His move has become a story in the Chinese business community.
Now, it's time to bring this story to life. Imagine Zhang Ruimin smashing Haier's old supply chain with a sledgehammer. Compared to smashing the actual product, the image is indeed a bit abstract. However, the results are equally valid. Haier's success in domestic and foreign markets also has another factor, and that is supply chain management.
In order to improve supply chain management, Haier has taken a series of actions. According to a case study done by SAP, Haier has adopted the following measures:
·Changed from the push strategy of determining sales based on production to the pull strategy of demand-driven production. This shift ensures that production always keeps pace with customer needs.
·Establish purchasing and production processes based on the principles of lean production.
·Redesign the factory layout so that raw materials can flow better as needed, while reducing inventory build-up.
·Turn the warehouse into a logistics center to truly realize the purpose of transporting raw materials and products through the system.
·Interrupt the production of unsalable products in a timely manner, and launch new products to meet the changing needs of customers.
“In the home appliance industry, companies are not only competing on price and quality, but more importantly, winning on the speed and efficiency of the supply chain.” said Liang Haishan, vice president of Haier Group (from SAP’s case).
This statement by Liang Haishan can be extended to any company in any industry. Regardless of the product, the impact of supply chain management on the success of a business is not just important, it's life and death. The industry has a correct understanding of this. In addition to Haier, there are many other outstanding enterprises have recognized the importance of the supply chain. Like Dell, its per capita operating income is well above the industry average; Wal-Mart's revenue has exceeded the gross domestic product of many countries; Toyota is now the world's second-largest automaker; Cisco dominates the network communications market.
What do these businesses have in common?
AMR Research, a Boston-based consultancy, believes that "the dominance of these companies is their supply chain excellence." In addition, these best-in-class companies are well aware that they cannot blindly pursue high-speed supply chains. Or low cost, as Liang Haishan puts it, it must also be "efficient".
Now, more specifically, efficiency refers to flexibility, adaptability, and collaboration (Agile, Adaptable, Aligned). A flexible supply chain is high-speed from start to finish. It is flexible enough to quickly adapt to changes in the business environment. This flexibility is important for all parties in the supply chain - from suppliers to end users. "Flexibility, adaptability and collaboration" represent the current state of supply chain management at its best. Stanford University professor Hau Lee (Hau Lee) is a strong advocate of these three words, which he calls 3A for short, and has written a series of research reports on the subject.
The benefits that companies can derive from a 3A supply chain are clear (see sidebar: "The Benefits of a 3A Supply Chain"). If your supply chain can't do 3A, the risk is also very obvious. In the research report Mitigating Supply Chain Risk Through Improved Confidence co-authored with Professor Martin Christopher of Cranfield University, Li Xiaoliang pointed out that when many companies start to worry that raw materials, parts and products will not be delivered on time, When it doesn't even arrive at all, they may switch to inefficient methods such as increasing inventories, increasing the number of warehouses, extending lead times to customers, and substituting lower-quality suppliers for top-tier suppliers.
These practices not only waste money and alienate customers, they also put businesses at risk of losing money and mislead and distort the entire supply chain. In discussing such lessons, Li Xiaoliang cited the example of Cisco. In the 1990s, as the company was unable to meet market demand for its networking equipment products, various links in its supply chain rushed to place additional orders to cope with the situation. This caused Cisco's inventory to balloon, and when real demand suddenly fell in 2001, Cisco had an excess of $2 billion worth of inventory on hand.
In order not to repeat Cisco's mistakes, companies should look at the three components of a 3A supply chain—flexibility, adaptability, and collaboration. These three elements are indispensable. The absence of either would disrupt the supply chain. Take a look at Haier's action steps listed above, which together make up the 3A. This reflects the overall consideration behind the 3A supply chain.
Companies with 3A supply chains can adjust their operations to cope with sudden demand surges or inventory backlogs. The need for flexibility and collaboration is now even more pronounced as the fronts of the supply chain are drawn longer and spread across the globe. Enterprises support their business activities in the global market by extending their supply chain, which requires a more efficient supply chain under the 3A framework.
Now, let's break down the 3A's and see how best-in-class companies manage their supply chains.
Element 1: Flexibility
Best-in-class supply chains are able to respond quickly to market changes. Li Xiaoliang believes that flexibility is critical to supply chains because in most industries, demand and supply fluctuate rapidly and violently.
The popularity of custom-made products is one of the main factors causing fluctuations in demand and supply. This trend has resulted in shorter product life cycles. The immediate impact this has on manufacturers is that products are only available for a limited time. Faced with such a situation, companies such as Haier will work closely with their channel partners to stock marketable products, thereby reducing inventory costs for both channel partners and manufacturers.
However, it's easier said than done.
To only stock marketable products means that manufacturers must produce on demand. The traditional practice of manufacturers is to obtain "sufficient" inventory through production. In doing so, however, they risk being unable to cope with sudden changes in demand. According to CFO Magazine, P&G has paid a heavy price for this.
On the eve of a holiday, one of P&G's factories shut down early. Because historical sales data show that the factory has produced enough Tide detergent to meet the market demand for the holiday. But just the weekend before the holidays, P&G executives received a surprise—one of the company's major retailer customers had just placed an unexpectedly large order of detergent. Unprepared, P&G took the order and immediately reopened the factory. But because it was a holiday, the company had to pay employees overtime and arrange expedited shipments to meet customer demand. In order to take this one order, Procter & Gamble ended up paying more than a million dollars.
Disasters such as these can occur if managers rely solely on historical data to make sales forecasts. For some businesses, the solution is to maximize the accuracy of forecasts. But who can really accurately predict sales? It's like asking how accurately you can predict the weather—a question that doesn't make any sense.
The right question should be: How quickly can we respond when requirements change? To answer this question correctly, companies must have real-time data from point-of-sale and suppliers. Once data shows a sudden change in demand, companies must be able to gauge the situation and quickly adjust supply.
It all starts with getting data from the point-of-sale terminal. Managers enter this data into their production schedule, which then drives purchasing. In this way, point-of-sale data becomes a guide for suppliers to fulfill their responsibilities. Now, companies are not stockpiling inventory, but stockpiling information.
This is the effect of on-demand production at its peak, but this is not the same as just-in-time manufacturing. Generally speaking, just-in-time production is just about reducing waste when passing inventory to suppliers. On-demand production is to pass the customer's data to the supplier, so that the supplier can determine the production according to the data.
To ensure that production-to-demand works, manufacturers must focus their efforts on improving the operational efficiency of their factories, ensuring that inventories of raw materials, work-in-progress, and finished goods are kept to a minimum. Manufacturers must also pay close attention to procurement management and control cost of goods sold.
It's not just manufacturers who benefit from a flexible supply chain, but retailers as well. 7-Eleven is the most profitable retailer in Japan. The company makes full use of the latest demand information obtained from the sales terminal to determine the speed of the store's replenishment. The update frequency of this information is calculated in minutes.
Businesses can make a lot of money if they can produce only what they can sell. According to AMR Research, companies that have adopted an on-demand supply chain can collect receivables 70 days earlier and bring new products to market 70 percent faster than their competitors.
