C OLLABORATIVE PROGRAM IMPACT ON S&OP EFFICIENCY

4.3.1 What is the desired value chain under collaboration?

Based on the previous elaboration of collaborative logistics program, the research further examine the impact on total value by making a calculation of total cost for both supplier and distributors. The purpose is to approve the presumption that collaborative programs enable cost reduction.

Prescribed Value Chain for Hisense AC BU.

As illustrated in value chain in introduction chapter, the desired value chain of AC business consist 3 important transactions.

First value adding transaction is factory production and physical movement from China to Hisense German warehouse. Hisense affords the fixed cost including a. product cost ex-work, b. transportation, c importation tariff, d. handling cost/inbound logistics expenses at Hisense German warehouse.

Second value adding transaction is that Hisense GmbH supply goods to local distributors with efforts of marketing and sales forces. Hisense affords the variable cost including a. operational expenses of warehouse(*inventory I), administrative personnel, b. marketing and services expense facing to distributors, and c.outbound logistics expenses before the goods arriving to distributors’ warehouse. Besides, Hisense and distributors jointly afford the variable cost including, d. return goods, e. aftersales maintenance, f.

marketing expenses facing to the end customers.

The third value adding transaction is that Hisense distributors supply the goods either to the installers or directly to the project owners with the packaged installing services provided by 3^rd installer. During this transaction, the distributors afford the variable cost including similarly a. inbound logistics expenses, b.

operational expenses of warehouse(*inventory II) and administration, c. marketing & sales expenses, d.

outbound logistics expenses, and they share with Hisense and end customers of costs including e.

technical services expenses, f. return goods and maintenances.

Based on above described structure, both Hisense GmbH and its local distributors bear the costs of regular inventory management. Without collaborative programming, very likely it would happen that Inventory I plus Inventory II exceed the sum of on-going projects from the market. Or, both Inventory I and II have the same article short of stock. As a result, the total cost of entire supply chain could raise, hence, price for end market would be driven up and lose the competiveness.

Table 4-11 Cost structure before collaboration

Prescribed options and complementary answers

Data analysis Novatherm Kaut Krone Coolair Frigotechnik Scheissl KKL Forina Zendre Atlantic Yark Lennox CoolMark GEA Temperit Hisense Sales Hisense Services Hisense Marketing Hisense Logistics

Average Cost Index Avg.

`+Manufacturing Cost 88 88

`+Transportation from external supplier to distributor * Inventory

II 15 10 10 5 15 15 15 25 15 15 10 20 15 15 15

According to the above description, the total cost structure before collaborative program is illustrated in the table 4-11. Both supplier and distributors afford operational expenses, inventory, services and outbound

logistics. Based on landed cost index as 100, the total cost for supplier is 125; the average total cost for distributors is 174.2.

Total Cost effective value chain

By reengineering the form of value chain, Hisense GmbH operational platform is visually combined with those of their distributors, under the tool of IT programs (integrated SAP and CRM program in the case company). The objective resides to maximize the collaborative planning and forecasting mechanism

between the supplier and distributors in order to reduce the total cost of integrated supply chain. The results approved the hypothesis, see table 4-12 Total Cost effective value chain, the total cost for supplier is 122;

the average total cost for distributors is 149.8.

Table 4-12 Total Cost effective value chain

Prescripted options and complementary answers

Data analysis Novatherm Kaut Krone Coolair Frigotechnik Scheissl KKL Forina Zendre Atlantic Yark Lennox CoolMark GEA Temperit Hisense Sales Hisense Services Hisense Marketing Hisense Logistics

Average Cost Index Avg.

`+Manufacturing Cost 88 88

`+Transportation from

logistics manpower) 10 10

`+Administration and

4.3.2 How could a collaborative program benefit both with cost reduction and for other aspects?

This last open question aims to inspire interviewees for constructive explanations. The researcher sorted all answers into three categories.

Benefits from Collaborative logistics operation

According to the professional experience from AC industry, the safety buffer level is around 30~35% of annual turnover; therefore, the total logistics expense for Hisense AC business rates at 3% over forecast turnover in the first year, and drops to below 2.0% after 3 year operation. Besides, the logistics operational expenses would be reduced significantly, that average stocking age is expected to reduce from 100 days to 60 days, lower than the average industry data, 4 times per year, 90 days. See table 4-13.

The main cost-saving drivers are as below:

Collaborative warehouse managements reduce the manpower from both; what’s more, it saves time of internal purchase process among distributors and supplier. The internal transportation routes are simplified, that all project orders can be fulfilled with one stop shipment from either central warehouse of Hisense GmbH or regional distributor warehouse.

Collaborative planning improved services related transportation, return goods, spare parts supply etc. The collaborative program improves the forecast accuracy; hence the inventory rotation ratio would be leveraged remarkably. This is the key factor which influences the S&OP efficiency in slow moving AC business operation.

Table 4-13Hisense AC BU Inventory vs. Logistics Budget

YEAR Turnover

Note: above includes AC product category VRF system. (3EURO/month/pallet)

Benefits from collaborative product management

• Suppliers received latest product specifications from competitors at the first time, for a better preparation of new R&D projects. For AC industry, normally it takes long time for discussing an EU regulation, yet, comes to ground once a sudden. For instance, the new ErP regulations which had been filed in 2008, got approved in November 2012, and came to effect January 1st of 2013. For many professional distributors, they prepared with their suppliers to phase out the old units months before to avoid the loss of over stock materials.

• Cut short of product R&D period by instructions from professional distributors.

• Partners could constantly check the cost of new products during R&D stage, to insure the competiveness after launch.

• Distributors reveal market opportunities of special application, so that supplier catch up additional market share. Collaborative product management would generate profit. Distributors instruct suppliers for planning and manufacturing special products facing to niche market. For instance, in EU, the energy efficiency level for air-conditioning equipment has been elevated on annual basis;

those products with higher efficiency would be rewarded with government incentives.

• Suppliers could be informed in advance of the regulation changes to avoid invalid R&D investment.

Benefits from Collaborative demand/supply planning

There are arguments stating the positive impact on demand/supply planning.

• Supplier would reduce the safety stock quantity as per each article code, especially for the slow moving AC models, due to the fact that the collaborative inventory programming realizes the visual warehouse serving for entire German market.

• Forecast from distributor is based on up to date project bidding information, which is more accurate than the historical data of shipments. Real name project registration avoid the multiple stocking from regional distributors

4.4 Summary

This chapter present empirical finding of the research by answering all sub questions. By analysing answers from interviewees, the researcher hereby draws conclusions.

(1) The trait of AC business nature is the DNA, which decides the business formation. Firstly, B2B distribution in professional AC channel leads to sophisticated decision making mechanism for project based AC sales. Besides, AC products are diversified in technology, origin, R&D cycle, and applications; therefore, AC S&OP efficiency is closely related to product management. Thirdly, full package of services is critical to AC business success, because the high level requests of services

reflect into operational issues such as inventory management and lead time management, etc.

(2) To design a more efficiency S&OP process, there are 8 collaborative elements that have been disclosed by research questions. AC supplier and distributors reply on each other on collaborative product management, collaborative inventory planning, collaborative services & technical support, and collaborative planning for transportation and collaborative manufacturing.

Due to the particular AC purchase cycle, distributors believe collaborative project sales with open information management, so that the upper stream supply chain prepares for serving the market demands effectively. Also, internal customers point out the necessary collaboration in marketing with distributors for effective brand building as new entrant to AC market.

Inspired by the discussion of above 8 elements, interviewees suggested a solution of integrated effective collaborative planning and forecasting programs. That is to construct a visual European logistic centre with IT tools; meanwhile to construct an open information platform for project registration management.

(3) As favoured by most interviewees, the researcher compared the cost structure of the value chain before and after implementation of suggested collaborative program in order to examine their impact on total S&OP efficiency. At the end, more evidence are yield as positive impact on cost reduction, researcher concluded 3 key elements that influence S&OP efficiency in Hisense GmbH, i.e.

Collaborative logistics operation based on visual tools, Collaborative product management, Collaborative demand/supply planning.