Haier Case Study

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SUPPLY CHAIN MANAGEMENT PROFILE

HAIER:

PURSUING THE CUSTOMER-INSPIRED SUPPLY

CHAIN

On August 28, 2008, Zhang Ruimin, the CEO of the Haier Group, announced that as of the next day the

company’s central distribution center would be shut down. From then on, Haier products would no

longer be sent to a central warehouse, where they would sit waiting until retail customers placed their

purchase orders. With the new “zero inventory” strategy, Haier would have to ensure that the supply

chain ran so smoothly that products moved without a hitch from the factory directly to retail stores.

This decision was revolutionary: the supply chain organization now had to deal with goods coming

off the product line and no place to house them. Yet just three weeks later, the company had put in place

a process that ensured a seamless flow of product from the factory all the way to the customer. Limiting

factory storage space—the factory can accommodate only one day’s worth of production—continues to

provide a means to reinforce the discipline.

This episode is just one example of the innovativeness of Haier’s approach to its supply chain

strategy and the value that approach has provided. With the belief that there is always room for

improvement, the company takes its supply chain very seriously, constantly examining and adapting it as

needed.

The journey has been unusually short. In just 27 years, Haier has gone from being a small

refrigerator factory in Qingdao, China, to the world’s largest brand of white goods—refrigerators,

washing machines, air conditioners, and water heaters—as well as a major producer of TVs, small

appliances, and smartphones. In 2011, Haier topped the list of major appliance brands worldwide for the

third consecutive year, according to Euromonitor1 International’s rankings. Revenue in fiscal-year 2011

totaled CNY 150.9 billion ($23.3 billion), translating into a 7.8 percent global market share.

“Haier’s supply chain is a competitive core competence for the company,” says Liang Haishan,

executive vice president of the Haier Group and president of the Haier White Goods Group worldwide.

“Every step of the way, the supply chain has proved a critical asset, helping Haier keep its eyes on the

customer.”

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BECOMING THE NUMBER-ONE WHITE-GOODS BRAND IN CHINA

Known in its early days as Qingdao Refrigerator Company, Haier got its real start in 1984, when Zhang

Ruimin was appointed managing director. At the time, the company was grappling with major quality

and infrastructure problems. In one year, three different managing directors had come and gone, and

Zhang expected he’d have the same experience.

A PRIORITY ON QUALITY

Zhang’s first step was to address the quality issues. After determining that 76 fridges fresh off the

production line had defects, Zhang took up a sledgehammer and set an example by smashing the

defective fridges to bits. The number that day was 76, he told them, but it could be 760 tomorrow and

7,600 the day after.

Zhang understood that to succeed against competitors, which in those days numbered more than

100, it was critical to produce refrigerators that were unparalleled in quality. An avid student of Western

management practices, Zhang looked abroad for guidance. In 1985, he forged a partnership with

Liebherr Group, a premium German refrigerator manufacturer, to transfer technologies and equipment.

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In the years that followed, Chinese demand for refrigerators skyrocketed, owing to population

growth and rises in personal-income levels. Under Zhang’s leadership, the Qingdao Refrigerator

Company focused on enhancing quality and building brand strength rather than on expanding output.

The strategy worked. When overproduction by competitors led to an enormous surplus of refrigerators

and deep discounts, Zhang refused to lower prices in the conviction that quality would prevail.

Competitors were forced to shut down their operations, while the Qingdao Refrigerator Company

thrived.2

The company—which changed its name to Haier in 1992—began expanding its operational

footprint in China. Over the course of the decade, Haier acquired several home-appliance companies that

had been performing poorly and added their manufacturing facilities to its asset network.

During this period, Haier also began developing what would become its greatest source of

differentiation: innovativeness based on close interaction with the customer. It set up a computerized

after-sales service center— the first Chinese white-goods company to do so. This was critical, because it

allowed the company to monitor product performance and provide maintenance and repair services to

many thousands of customers.

THE RETAIL NETWORK

Not surprisingly, Haier’s retail-customer base grew as well. In the early years, growth occurred primarily

in China’s urban areas. More recently, demand has grown in rural areas as a result of the 2009 state

agrarian policy, which provided subsidies for refrigerator purchases as a way to stimulate growth during

the Great Recession.

To facilitate distribution to rural consumers, the company accelerated the development of its retail

network. Haier stores began cropping up all over China. Today, Haier has 6,000 county stores, 24,000

town stores, 150,000 vendor contractors, and 19,000-plus service centers.

Haier has aligned its retail network with China’s tier system, which categorizes cities based on

economy scale and population size. In tier 1 cities (Beijing, Shanghai, and Guangzhou) and tier 2 cities

(provincial capitals), consumers can purchase Haier refrigerators at multibrand retail channels. These

include Wal-Mart and China’s leading appliance and electronics retail stores, Gome and Suning.

Consumers in tier 3 cities like Qingdao get their fridges at those stores as well as smaller stores that

carry only Haier products. In tier 4 towns and villages, consumers also go to Haier-branded stores,

though in some rural villages, the shop often consists of no more than a kiosk marked by an umbrella.

Wherever consumers are located, the retail store plays a critical role in Haier’s value proposition.

All stores serve as a place where consumers can learn about and purchase the model that best fits their

needs. The Haier-branded stores also serve as maintenance and repair centers. People can contact a

toll-free hotline and bring their appliances to the nearby Haier store for repair.

THE PEOPLE ON THE FRONT LINE

Whether the retail store sells many brands or just Haier, Haier employees are there to support retail

customers as they select their refrigerators. Approximately 30,000 of the company’s 80,000 employees

are in sales, which is roughly the same number Haier has in manufacturing. Large by any standard, the

sales force allows the company to enjoy an exceptionally high level of interaction with end-customers.

Explains Yang Qiaoshan, Haier’s general manager of market operations for China, “This approach

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means the customer has a better buying experience, while the company gets the information it needs to

develop products that are better suited to customer requirements.”

Not only are the sales staff very knowledgeable about Haier products, they are key to ordering and

inventory management. Using a proprietary system called eStore, they provide a continual feed of data

from stores throughout China to inform the sales and operations (S&OP) planning process. This ensures

that the people involved in the supply chain organization always know how many fridges of each model

have been sold each week, and this knowledge helps them estimate how many will be ordered in the

coming weeks.

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The information provided from each store is critical. More frequent— and therefore more accurate

—demand signaling drives production planning and has helped Haier cut inventory by almost half and

reduce inventory of raw materials as well as finished goods by almost three-fourths.

PRODUCT INNOVATION COMBINED WITH SUPPLY CHAIN INNOVATION

Urban and rural end-customers vary greatly in their lifestyles. Haier’s operating models are designed to

satisfy the gamut.

The factories are set up to facilitate mass production of dozens of refrigerator models, which

translate into hundreds of unique products across Haier’s strategic model, with its low-end, value, and

high-end brands. More than 80 percent of refrigerators are made to order. The remaining are “made to

commit,” which are more-customized products that are configured on the basis of the retailer’s

commitment to sell them.

The refrigerators are all produced in Haier industrial parks, where factories and suppliers sit side by

side. In the Qingdao Industrial Park, Haier Refrigerator Division 1, a plant focused on two- and

three-door fridges, produces nearly 2 million units a year.

Haier is able to profitably produce as many types of refrigerators as it does for several reasons.

First, the company has integrated supply chain considerations into design. Each refrigerator is designed

in modules: five main systems (outer frame, door, electrical controls, cooling system, and packaging)

and 23 subsystems. Haier uses modularization to speed up the design process and to facilitate the

manufacturing process. “Platforming and modularization are the means for integrating modular design,

modular supply, intelligent manufacturing, and virtual-network marketing,” notes Zou Xiwen, a senior

executive responsible for modularization of products at Haier. “They are key to end-to-end management

of customer requirements.”

Collaboration with suppliers plays a major role in modularization. Take, for example, the

refrigerator cooling system. To assemble a compressor unit in the past, Haier would procure the

compressor, evaporator, and condenser from several different suppliers. Recently, Haier reduced the

number of suppliers to just two, and asked them to provide entire modules. Using a new collaborative-

design process, Haier worked with these suppliers to develop a cooling system that reduced refrigerator

power consumption by 30 percent and time to market by 33 percent.

Haier’s profitability is also due to Haier Logistics, a subsidiary that takes care of logistics, both

inbound and outbound. On average, 1,000 full trucks leave Haier factories every day with finished

products. This capability makes it possible for retail customers to promise end-customers speedy

delivery. It also allows Haier to stand by its guarantee of 24-hour delivery in many locations; in some

Haier stores, in fact, it’s possible to buy a fridge in the morning and have it delivered that afternoon.

Haier also focuses avidly on working capital. “Cash is like air” is a mantra the company lives

by—the idea being that you can live without water and food for a few days, but you cannot live without

air. Accordingly, in addition to very tight inventory management, the company doesn’t ship an order

until the retail customer has paid in full.

But above all else, it’s the focus on the end-customer that drives Haier’s growth and profitability,

from R&D all the way to after-sales service and support. Ideally, no product is developed without taking

account of what customers want, and no product is manufactured without a real customer order. Notes

Executive Vice President Liang, “With better-designed products, we create greater value for the

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customer—and for Haier as well.”

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BECOMING A GLOBAL LEADER

Haier’s global-expansion efforts are fueled by the same customer focus that made the company so

successful in China. Whether it’s fridges with a videomessaging device integrated into the door for

European families or mini-fridges built to fit under desks for U.S. college students, Haier has

consistently developed products with features that speak to its customers’ needs.

DIFFICULT FIRST, EASY LATER In 1990, Haier launched a three-step strategy that defied conventional business wisdom. Instead of

starting with developing markets, Haier first targeted what it considered “difficult” markets—that is,

Western markets with developed economies. And instead of offering low-priced products as many

Chinese companies did, Haier looked for unfilled niches and created products that filled those niches

without compromising on price. Haier believed this strategy was critical for building brand equity.

Haier’s Global Footprint in 2011

Source: Haier

Accordingly, Haier’s first substantive venture outside China was the United States—which, with its

high cost of manufacturing and many competitors, certainly qualified as “difficult.” Haier products

—compact fridges—were already being imported to the United States by a New York–based import

company. To break into the U.S. market in a big way, Haier inked deals with the biggest of the big-box

stores: Home Depot, Best Buy, and Wal-Mart. At the same time, Haier established an industrial

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park—its first outside China—in South Carolina. It also established a warehouse in New Jersey for

storing goods imported from China.

STAY IN Recognizing that niche products were only a way to gain entry to difficult markets, Haier decided to

start producing mainstream products. The company viewed this as critical for becoming a major brand in

those markets. To realize this goal, the company deployed a “three in one” approach—localized design,

production, and marketing—to understand local customer requirements and to satisfy their needs.

TAKE THE LEAD Haier then focused on becoming a brand cherished by local consumers. The strategy was to sell

innovative products that differentiated Haier as a trendsetter. To take one example: for people in Africa,

where power outages were a common occurrence, Haier developed a no-frost freezer able to keep food

frozen for 100 hours. The freezer’s success confirmed the company’s number-one position in the

Nigerian market.

Haier supplemented its three-step expansion strategy with the occasional acquisition. The most

important of these was the 2011 purchase of the white-goods and consumer-appliance business of

Sanyo. This move gave Haier a firm foothold in the Japanese market.

Today, Haier’s operational footprint spans six large regional markets in addition to China: the

Americas, Europe, the Middle East, Southeast Asia, East Asia, and South Asia.

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GLOBAL AND DOMESTIC SUPPLY CHAINS: COMMON LINKS

Although Haier’s domestic and international growth trajectories differ markedly, the supporting supply

chains have some important things in common.

First is the global supply chain organization. Haier consistently staffs its overseas operations with

local managers who have experience in leading white-goods companies. These managers then hire local

teams and develop local sales and distribution channels.

Second are the common processes that Haier has developed to drive collaboration across functions

and across geographies. Haier has a single point of global leadership for defining harmonized supply

chain processes, including demand planning, procurement, manufacturing, logistics distribution, and

order delivery. “Given the breadth of our organization, we need common ways of working such as

standardized language, processes, and KPI definitions to collaborate effectively,” notes Haier’s vice

president of supply chain, Lim Chin Chye, who oversees the company’s global supply chain. “Haier

adopted the SCOR® model to achieve this.”

Another critical element is the S&OP process. Executives from headquarters in China and the

regional sales offices worldwide align sales and manufacturing plans on a weekly basis. This is no small

challenge, given that more than 200 refrigerator SKUs are produced for China and an additional 400 are

manufactured for the rest of the world.

No less important, Haier emphasizes the same performance metrics across the company’s domestic

and global supply chains: velocity, predictability, and flexibility. When it comes to measuring velocity,

Haier deploys a number of metrics: order fulfillment time as well as the different components of order

fulfillment (order to manufacture, order to ship, and so on). Using a proprietary system, the company

can see predictability and velocity performance by key account as well as by factory, so it can take

action as needed.

At Haier, supply chain performance management goes well beyond tracking and reporting

performance. Under Haier’s “individual goal alignment” model, targets are directly assigned to

individuals and teams. These targets include forecast accuracy, which is assigned to sales teams; order-

to-delivery cycle time, which is assigned to supply chain planning teams; order-to-ship cycle time,

which is assigned to factory management teams; and order daily clear, which is the number of orders

placed in a day and a target for production line teams. Unlike in many other organizations, there are

consequences for not meeting targets. If a district sales manager orders too many fridges and therefore

exceeds target inventory levels, his compensation is reduced; if he sells more than were ordered,

compensation is increased.

NO EVERLASTING SUCCESS

Haier has come a long way in the past 27 years, but the journey is far from over. Opportunities for

growth in China remain considerable. With only 24 million people earning more than 3,500 RMB a

month, which is the threshold for paying income tax, the standard of living is bound to rise. This will

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likely open up a whole new market for Casarte, Haier’s high-end brand.

Setting its sights on a more global operation, the company is firmly committed to its “three thirds”

strategy: one-third of products will be manufactured and sold in China, one-third will be manufactured

in China and sold abroad, and one-third will be sold and manufactured abroad. Haier is not there yet, but

it is well on its way.

In the Haier museum in the company’s headquarters in Qingdao, you can read in large letters the

slogan “No everlasting success.” The constant search for improvement and refusal to accept the status

quo is part of the Haier DNA.

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While it’s difficult to predict the path the journey will take, one thing seems certain. Haier will

continue to challenge the way it is operating in order to stay at the top of its industry—and the customer-

inspired supply chain will continue to be critical to success.

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