SAP Case Study
mySAP™ SUPPLY CHAIN MANAGEMENT AT HAIER
The company had diversified its product line. Haier had achieved name-brand recognition in China. when the chief executive officer picked up a sledgehammer and began to smash newly assembled refrigerators.7 days Lowered inventory days of supply from 26. and incorporated as a group company in December 1991.7 days to 7. Haier was originally founded in 1984.5 million annual savings) Lowered relative cost of goods sold by 5.7 days
In 1998. developed products that would be attractive in various markets around the world.1 billion ($8. which was built on its historical foundation of brand development and diversification – coupled with implementation of lean supply chain processes to achieve high throughput with minimal cost. and air conditioners had increased to about 30%. Sales have increased an average of 73. Haier’s early focus on quality contributed to the company’s rapid growth. Beginning its business reengineering with centralization of order handling in 1998.000 retail outlets worldwide. and the fifth largest in the world. mySAP Supply Chain Management and other SAP® solutions were among the tools enabling this approach. and sells its products in 160 countries. Results Achieved over the Period October 2000 to October 2001
· Overall sales increased 50% and raw materials
days of supply shortened from 30 days to less than 10 days Refrigerator Group
· Reduced supply chain management costs related · ·
to cost of goods sold by 26. By the late 1990s.2 million annual savings) Lowered order fulfillment lead time from 10.7% of revenue ($4. employs over 30. and shortened cycle times.
. Haier had become the world’s second-largest refrigerator manufacturer and the third-largest producer of washing machines. washing machines.1% to 16. and its domestic market share in refrigerators. With annual sales of RMB 71.8 to 11. implemented just-in-time inventory management.7% ($4.7 million annual savings) Attained on-time delivery-to-commit rate of 99.7 to 6. At the same time. The reason? To show that poor quality products would no longer be tolerated. the company shifted from make-tostock to make-to-order production. Haier started to look beyond China for more growth opportunities.000 different products. freezers. the company established appropriate partnering strategies on a case-by-case basis.5% ($3.6%
· Reduced supply chain management costs related · · ·
to cost of goods sold by 14. To support this approach. the Qingdao-based company manufactures 13.8% per year from 1984 to 2002. The company established international design centers. By 2000. and the company’s goods are now sold in 50.
· Accelerate expansion into foreign markets to
ensure continued high growth rates
· Differentiate by offering greater value at each
· Reduce capital and inventory costs associated
with decreasing product life cycles Approach Haier developed a strategy to grow internationally. Haier set out to achieve globalization by providing personalized products to meet each customer’s needs. and took important steps in supply chain management. and established offshore production and distribution through direct investments and partnerships.6 billion).000 people.AT A GLANCE: mySAP™ Supply Chain Management at Haier Strategic Goals
REENGINEERING BUSINESS PROCESSES TO REACH THE WORLD’S APPLIANCE MARKETS
The Haier Group is the largest manufacturer of “white electric appliances” in China.4 days Reduced cash-to-cash cycle time from 21. The company had a defining moment at the beginning of operations.3% to 75. and embarked on a strategy to globalize operations.
creating products in dozens of categories. including the adoption of JIT raw material and finished goods inventory management. With process reengineering. including substantial domestic and offshore competition. Haier achieved consumer recognition as the premier refrigerator manufacturer in China. demand-oriented operations. It also established a better way to manage the flow of physical goods and capital that are connected to customer demand. and put in place just-in-time (JIT) inventory management principles. Haier achieved a market advantage by adopting an approach focused on centralized order handling. vice president of the Haier Group. Haier was in the position to grow internationally because of its successful domestic growth strategy (see Figure 1). “Since SAP is used in many Fortune 500 companies.
70 60 50 40 30 20 10 0 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01
Maytag (US$) Whirlpool (US$) Electrolux (US$) Haier (RMB)
12 10 8 6 4 2 0
Figure 1: Revenue of Selected Appliance Manufacturers
Haier’s strategic course can be viewed in three separate phases. Led by Zhan Ruimin.” By reengineering its business processes. and government regulation. Using this optimized approach. which are consistent with the concepts of lean manufacturing and distribution. Haier chose mySAP™ Supply Chain Management (mySAP SCM) and related mySAP Business Suite solutions. establishing the foundation for future growth. After a thorough analysis of the alternatives. the company placed high quality above price considerations. Haier faced significant challenges in executing that strategy globally. from 1992 through 1998. The company marked this second phase as its “diversification
. Haier could achieve higher rates of factory throughput and better customer service with minimal cost and capital investment. and global trade. While Haier recognized the importance of affordable pricing. with full visibility of supply and demand information worldwide. During this time. product life cycles are becoming shorter. The first – its “famous brand strategy” – lasted from 1984 to 1991. However. the company’s chief executive officer.” says Haishan Liang. shortening product life cycles. However. but more importantly. using a highly responsive supply chain planning process. the company was able to minimize material inventories in its production network and become more responsive to market demands. information technology manager of the Haier Central Logistics Division. “After careful consideration. running lean processes required a new supply chain strategy – one that would allow the company to benefit from production efficiencies and economies of scale.“In the appliance industry. “Competition among enterprises is not only based on price and quality. Haier also shifted manufacturing operations from make-to-stock (MTS) to make-to-order (MTO). we selected mySAP SCM because the solution could be adapted to support our emerging business processes. Through these actions.” says Li Zhan. on the speed and efficiency of the supply chain. we were confident that the solution would scale to support our needs as we expanded internationally.”
Challenges and Objectives Less than 20 years after its founding as a state-run manufacturer of refrigerators. Haier expanded into other businesses. Haier sought to appeal to the market by creating virtually defect-free products. During the next phase.
The buyer in China wants to select from a number of features. Much of the growth during this phase has come from international sales.
PERSONALIZATION AND SHORT PRODUCT LIFE CYCLES
Haier emerged as the market leader in appliances in China.8 billion ($2.strategy.” entering into new market segments that included washing machines and air conditioners. choosing to work
. Shelf space is at a premium. competition among enterprises is not only based on price and quality. and ensuring profitability of new products. also expects a fair amount of personalization. on the speed and efficiency of the supply chain. Haier had achieved leadership in China by creating high quality products with innovative features. and taking new measures to counter growing domestic competition. avoiding increases to marginal costs while sustaining quality. and inventory management. longlasting products with unique features. Haier became attentive to the fact that the product life cycle for appliances was increasingly shorter. China’s export of appliances grew 60%. as a result of more rapid advances in technology and ever-changing consumer tastes. China was formally accepted into the World Trade Organization. and the company found that it was competing on price in offshore markets. With its diversified product line and economies of scale in manufacturing. . preventing a proliferation of stockkeeping units. long-term growth. Haier’s objective in this phase was to increase the use of existing assets to grow revenues. Nonetheless. colors. In 2001. . so Haier also works closely with resellers.03 billion). In that year. and styles. stocking the right selection of products to keep inventory costs low for both the reseller and Haier. Haier decided to use distribution partners in all but the largest of its international markets. effectively removing many trade barriers with other member nations. and was starting to address differentiation in a global setting by
In China. Haier eliminated the cost of building and maintaining facilities. products with stylish features such as smoked glass and contoured corners.
“In the appliance industry . In 1998. With this success came new challenges mirroring those that Haier had faced in its early development phases:
The Chinese consumer. The company long ago realized that meeting these demands leads to higher rates of customer satisfaction and brand loyalty. production. paying only for the attributes desired. However. As a result. besides demanding high-quality.05 billion ($0. This shortened product life cycle added competitive pressure and required new approaches to planning. with sales increasing more than 15-fold from RMB 1. These agents provide Haier with valuable data regarding current consumer demand and how future products can be improved. the company needed to determine how to fully replicate its success in China by becoming closer to international markets. averaging only 18 months. Haier experienced tremendous growth during these years. Haier sells through resellers. better managing new product introductions. Haier began implementing its globalization or “internationalization strategy” in 1998 to establish new channels for sustainable. but more importantly. maintaining close contact with end users through a network of thousands of service agents. The approach to differentiation that Haier had adopted in China – with products such as compact refrigerators with functional desktops for students. The company also focused on introducing product innovations that were important to consumers. Vice President of the Haier Group
establishing design centers in the United States and other countries.
Haier was not an established brand in many western nations. refrigerators that limit bacteria growth.”
Haishan Liang. During the mid-1990s.127 billion) to RMB 16. and more energyefficient appliances – required adaptation for competing internationally.
and distribution. but Haier has long recognized that brand loyalty is virtually nonexistent in the lower-price markets. Despite Haier’s success countering international competition. “We face strong competition around the world. albeit successful brands such as Samsung and Maytag are also major competitors. manufacturing. market is very large. encompassing design. The company’s expansion into foreign markets resulted in direct competition with every major appliance manufacturer. “Sometimes.
During the mid-1990s. by exchanging resources and information – and by working jointly to satisfy market needs. As Haier continued to grow globally. Also. and washing machines. this case study has focused on business performance measurements for Haier Refrigerators and the Haier Washer Group. Nonetheless. and finished goods inventories are kept at a minimum. However. Haier must also closely manage procurement processes to ensure that the cost of goods sold are kept to a minimum and that the right products are manufactured on time with high quality. and without the risks associated with partnership. This partnership structure aided Haier in sales. Haier owns and manages full-scale operations. Haier Refrigerators is the core division of Haier Group. Foreign companies attempted to export products that were successful in their home markets. Since the U. This division has over 6. since any of these companies can also be a partner. this international reseller channel still required the company’s full attention. competitive. and growth challenges across its several strategic sectors. in large markets such as the United States. as are niche brands.” says Liang. Haier Refrigerators has 12 product
Haier exports products from China.000 employees in 22 subsidiaries. Haier’s strategic approach has been both flexible and astute.S.with partners who are highly aware of the company’s individual markets and local government regulations. depending on the specific market and Haier’s strategy in the region. and production planning processes. refrigerators.
“. Haier faced differentiation. which include freezers. personalization. Haier must comanage every distribution process to ensure that the partner receives timely delivery of the right products. including market leaders such as Electrolux and Whirlpool. distribution. we selected mySAP SCM because the solution could be adapted to support our emerging business processes. foreign competitors such as Whirlpool and GE acquired existing Chinese manufacturers in an attempt to gain traction in the world’s most populous market. Haier can profitably run a wholly owned subsidiary without having to share its profits. air conditioners. these offshore firms were not prepared to meet the servicing needs of the Chinese market. cost-containment. Haier faces the same manufacturing challenges in the United States.”
Li Zhan. To understand how the company succeeded. marketing.” Implementation With its global strategy moving forward. This strategy has gained some traction in the lower-income segments. Other domestic competitors concentrate on price. work-in-process. but which were viewed by Chinese
. . and thus must focus its attention on the efficient operation of its production facilities. foreign-based companies such as Samsung and Electrolux remain well positioned. making certain that raw material. Smaller. Haier Central Logistics Division
consumers as limited when compared to the feature-rich products available from Haier. Information Technology Manager. our approach is to collaborate with companies we traditionally regard as competitors. and had difficulty providing after-sales service to such a high number of customers. offering fewer features and virtually no customization. . the company encountered the same international competitors it had faced on the domestic front.
the Haier Washer Group. Also in 1999. and televisions:
. and finished goods. that cycle times were as short as possible. To implement this approach. and logistics of its entire operations encompassing 23 business units. work-in-process. This solution was also chosen for its capabilities relevant to appliance manufacturing and distribution. Haier redesigned shop-floor layouts in manufacturing facilities and warehouses for better material flow to meet demand. Haier undertook a comprehensive review of its operations. mySAP SCM was selected because the solution’s capabilities map well to Haier’s centralized order-handling procedures and associated production processes. distribution centers.000 specifications. Pakistan. energy supplies. The Haier Washer Group conducts business in 100 countries and operates joint ventures in Iran. The company carefully considered its new product introduction and product phase-out processes to be consistent with the concepts of lean systems – ensuring that all steps were value adding. The company estab-
lished production processes to ensure that demand would be met according to lean JIT principles. The division’s sales network consists of about 500 distributors and 36. Haier began a series of major overhauls to its businesses. covering all product lines. In fact. the company established criteria to evaluate when to discontinue products and how to handle the transition to new products to meet anticipated customer requirements. Finally. Through this analysis.000 dealers in 100 countries. and eliminated inputs and procedures that were not adding substantial value. Haier decided to reengineer its business processes.
SELECTION AND IMPLEMENTATION OF SAP SOLUTIONS
To support these new processes and position the company for global growth. plant utilization. As with Haier Refrigerators. The Haier Washer Group produces washers in 18 different categories with more than 5. The implementation unfolded throughout the company’s 23 divisions. mobile phones. among other countries. air conditioners. handling logistics and inventory.categories and the leading market share (27%) in China. Processes lacked discipline and uniformity. and to reduce the accumulation of raw materials. Haier leads domestic share with nearly 26% of the market. and that incoming materials would easily flow to meet production requirements according to these same principles. labor cost. and managing production would hinder its ability to grow globally. and labor. This shift ensured that production was meeting customer demand. capital investment. and were developing in response to independent needs in various plants. As Haier began executing its international strategy in 1998. integrating the planning. putting in place flexible practices which would allow the company to meet high factory throughput and customer service demands with minimal inventory. as well as its support of international business transactions. Haier determined the essential raw materials. using Pareto analysis techniques to uncover the vital few elements of supply and demand that influence inventory levels. including refrigerators. and processes that create value for customers. Haier shifted from production push-based. the company realized that inefficiencies in managing its growing number of products. and Nigeria. MTO processes. and simulated a customized approach to order fulfillment. In 1999. and that inventory and labor use were minimized. As part of the reengineering effort. and other operating units. MTS manufacturing to demand pull-based. and cycle times. management. washing machines. the company transformed warehouses into distribution centers to reinforce the concept that material and goods were to be constantly moving through the system. Haier selected mySAP SCM and related SAP solutions as its primary enabling software solution (see Figure 2).
) The comparison of key performance indicators revealed that Haier had fully increased its competitiveness through business process reengineering focusing on centralization of order handling. which were transformed through this implementation into distribution centers. Haier engaged the consultancy High Tech Associates to monitor the results of the implementation. shortened raw materials days of supply. There were about 1. Following this implementation. The SAP-enabled processes brought rapid and significant benefits. innovation. have been sustained by the company’s reputation for high quality. and responsive customer service. the company decreased its supply chain costs while operating in the severely competitive markets for white electric appliances. Significant improvements also included a 50% increase in sales. and the business-to-business procurement capabilities of mySAP Supplier Relationship Management. which have flourished over the last 20 years. materials management.000 internal staff. and integrated seamlessly with other systems. and to compare the results to industry benchmarks provided by The Performance Measurement Group. (Haier Refrigerators and the Haier Washer Group were used for this analysis. warehouse management. especially in the areas of procurement and raw materials carrying costs. The warehouse management capabilities of mySAP SCM were implemented in 42 finished goods warehouses. a subsidiary of the management consulting firm PRTM. almost perfect on-time delivery-to-commit rates.
Finished product logistics
Material flow Purchasing JIT Logistics Raw material logistics JIT Logistics Finished product logistics JIT Logistics
COMPUTER INFORMATION SYSTEM HAIER CULTURE
Figure 2: Haier’s Network Model Based on mySAP SCM 1
April to October 2000 mySAP SCM was implemented to enable lean processes (a synchronous logistics model with the feature of centralization of order handling) for the Haier Central Logistics Division. The financial and associated master-data capabilities of SAP® R/3® were implemented along with capabilities of mySAP SCM. including production planning. average time for finished goods in transit at these distribution centers was less than seven days. and reduced cash-to-cash cycle time. average time for material waiting at distribution centers before being sent to production centers was reduced to three days. This led to a growing interest companywide in implementing SAP for logistics processes. and other countries it is penetrating. Top management at Haier is already seeing that their global market strategy is successfully leveraging this strong brand reputation within the new consumer markets of Europe. LLC. in dozens of different roles. lowered order fulfillment lead times. it recognizes that its domestic markets.January to March 2000 Haier completed its first implementation of the materials management and warehouse management capabilities of mySAP SCM in the air conditioner division.
Courtesy of High Tech Associates
. using the SAP solutions. With its strategy supported by a strong supply chain. As Haier moves forward.
Order information flow Order information flow Order information flow
NETWORK(mySAP SRM + SAP R/3 + mySAP SCM) Information flow
Global purchasing network Global customer network
October 2000 to April 2003 mySAP SCM and related SAP solutions were implemented in 10 additional divisions. which supports 13 product divisions. Moreover. the United States. and utilization of transportation and storage capacity was increased. Haier has placed itself into an excellent position to grow its business overseas as well as meet stiffer competition at home. Comparison to industry benchmarks: To guide the implementation and identify opportunities for improvement.
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