CHAPTER 4 EMPIRICAL FINDING
4.2 K EY ELEMENTS IN COLLABORATIVE PROGRAM
4.2.1. How much does AC product S&OP rely on collaboration of regional distributors? What are the main drivers?
According to the interview, among the 15 companies, 14 of them have been involved in various types of collaborative programs with their customers, and all of them believe that each of the practices impact the S&OP performance to certain degree.
Table 4-2 Interview Data Are you working with current suppliers under any
collaborative programs? Yes/No 93%
What are they?
>=50% as effective evidence
Collaborative program for product development facing to the
market regulations, new ErP, etc. 67%
Collaborative sales planning for each refrigeration year 53%
Collaborative manufacturing plan for special products 47%
Collaborative inland transportation according to project
locations 27%
Collaborative services technical support 53%
Collaborative marketing and PR events programmes 47%
Collaborative project sales facing to project owners 53%
Collaborative planning for Local inventory 60%
Shown in table 4-2, distributors share their collaborative programs with researcher. There are in total 8 topics of collaborative relationship. With importance sequences, they are:
(1) Collaborative product development (2) Collaborative planning of inventory (3) Collaboration in services
(4) Collaborative project sales (5) Collaborative planning for sales (6) Collaborative marketing
(7) Collaborative manufacturing plan (8) Collaborative planning for transportation
The researcher found that here are five common collaborative programs are undergoing with more than half of the interviewed companies. Out of the five common programs, companies believe 3 programs
contributing the most to the S&OP efficiency.
Table 4-3 Interview Data
To what degree do you believe that collaborative program in each issues would improve your S&OP efficiency? A. Do not believe, b. possible, c should be, d. Very likely, e.
firmly believe
a=1.b=3. c=5.d=7.e=9 (>=7 as relevant)
Collaborative program for product development facing to the
market regulations, new ErP, etc. 62
Collaborative sales planning for each refrigeration year 41 Collaborative manufacturing plan for special products 48 Collaborative inland transportation according to project
locations 32
Collaborative services technical support 57
Collaborative marketing and PR events programmes 46 Collaborative project sales facing to project owners 46 Collaborative planning for Local inventory 57 Collaborative product management
Among all the collaborative elements, interviewees consider product R&D of the most significant elements (67% votes). It is firmly believed as a driver of S&OP efficiency improvement, with highest score in table 4-3.
The argument is that “AC products specifications are of great complexity, at meantime, the produce R&D and advancement cycle is essential to the market share”. Consequently, joint planning of product R&D programs by market frontiers and manufacturers would accurately target to the actual demand, hence avoid the waste of inadequate product development, improving the S&OP efficiency. As explained in literature review of AC product management, R&D request follows a reciprocal information flow in the distribution
channel. Normally, information flows from AC installers or distributors back to the producers after 3 months after shipment. It takes even for producers to receive feedback from end users.
Collaborative inventory planning
The second important collaborative element is Collaborative inventory planning (60% votes). The explanations for the result relate to AC purchase cycle. The argument is that “Variable AC purchase cycle require local European inventory for reduce transport cost for urgent projects”. Underneath the statement, two issues need to be clarified, one is that half of AC brands are on import basis, and the other is that AC purchase is on project basis.
From the open question, the researcher found some distributors more motivated to collaborate with suppliers than some others. It relates to their different experiences with Imported Brands. Among the 15 interviewed companies, half of them have no experiences with Chinese brands; those who had chance to work with Chinese brands, as well as those who had experiences in the last decades bringing Japanese brands onto European market, elaborates their unique understanding on collaborative inventory planning (Table 4-4). It is because of long distance from production line to local warehouse. Due to the complex decision making process, AC purchase cycle is unpredictable; therefore, collaborative inventory planning would leverage Good-in-stock ratio, avoiding urgent shipment with higher freight.
Table 4-4 Interview Data
Prescribed options and complementary
answers Data analysis Novatherm Kaut Krone Coolair Frigotechnik Scheissl KKL Forina Zendre Atlantic Yark Lennox CoolMark GEA Temperit a=1.b=3. c=5.d=7.e=9
A. European b. Japanese, c. Chinese, d. or mix of above
30
% 7 3 5 3 7 3 7 1 7 3 3 1 7 1 3
a=1.b=3. c=5.d=7.e=9 (>=7 as relevant)
Collaborative planning for Local inventory 57 7 5 5 7 9 5 5 3 9 7 5 5 9 3 9
Another argument is that “Biliary forecast and planning for potential orders would reduce cost of safety stock”. The principle of collaboration is derived from the nature of AC product & channel that project based sales reply on vertical information flow. Under this concept, the central platform, Hisense GmbH for instance, creates an open system, namely Project Registration System* (defined by the case company), where, distributors can get access freely and register “opportunity sales”, while the according articles in the central warehouse would be reserved with timely priority. Hisense GmbH is able to have full view of entire market demand from all regional distributors, so that the management team would have concrete evidence
to program replenishment from production base in China. This open system could effectively prevent multiple stocking among distributors for the same projects, reducing the cost of safety stock.
Collaborative services and technical support
The third important collaborative element is Collaborative services and technical support (53%votes). The argument is that “AC business is services bounded that services quality is a critical index for project based supply”, and “Services quality is a key index for AC brand building in professional channel”.
As explained in traits of AC business nature, Presales/Sales and aftersales services contains multiple conducts, which take place among suppliers, distributors and installers. All parties must fulfil comprehensive services conducts based on collaborative mechanism.
The distributors requires local partner:
a. To provide IT back up with local platform, e.g. integrated ERP and CRM system.
b. To proactively participate and jointly invest in Professional Channel penetration, Technical Seminars, Service platforms, etc.
c. To operate in alliance to bear the aftersales costs and technical assistance.
The aftersales expenses mainly consists two stages, the start-up and the maintenance. Usually for the first stage, the installer or the services agent conduct the work and charges maximum 5% project value fee for the services. For the second stage, 3rd party service agent provide the services while charging approximately 4% project value fee including labour cost and replaced components, and the fee goes to supplier (if within warranty period) or to the client(if after warranty period).
Table 4-5. Projects Sales & Aftersales Expenses distribution
Stage Vendor Contract Executor Expenses Payer
Project Start-up
<5% project value Equipment buyer
Aftersales &
time labor, plus free of charge components and
Collaborative planning for transportation and manufacturing
Besides the above top three main factors, most distributors show interests to an innovative model of business operation, which is extended application of CPFR model. The argument is that “A shared logistics planning program contributes to effective Project supply”. Based on the PRS principle, supplier has the full picture of requested articles for undergoing projects; therefore, Hisense could optimize the goods transportation route for individual job sites. More importantly, the distributors could indicate to the manufacturing plants for forested shortage of AC units, spare parts, and components.
4.2.2. What are the key influencers to purchase cycle of AC distributors?
The interviewees discussed the various influencers to the AC purchase cycle, and 100% of them mentioned for “project based sales nature”, 20% point out “types of construction”, 60% highlighted “brands”, 20% voted for “project initiation”, and 40% addressed “product solutions”. Table 4-6. The argument is that “AC project sales involve complex decision making process, which requires effective information management process”.
Table 4-6 interview Data
Professional AC sales required sales based on projects 100%
The nature of construction projects, e.g. government projects, private
projects, etc. 20%
Brands of the solutions, e.g. new entry brand, or matured brands on the
market 60%
Project initiation, e.g. earlier stage, final stage of AC definition. 20%
Product solutions: water system, or DX system. 40%
Collaborative project sales
According to the professionals’ experiences, from get to know the project reference till being requested to ship the goods to the job site, distributors might wait for as long as 18 months or as short as 1 week, depending on various influencers, such as AC brands recognition, types of projects, project initiation, and AC solutions. In the table 4-7, various influencers vs. lead time have been categorized. Besides regular product supply, repair and maintenance are always in top urgent. Under this practical feature, the distributors include to collaborate with suppliers with open information management, so that the upper stream supply chain prepares for serving the market demands effectively.
Table 4-7 AC Project Influencers vs. Lead-time Requirement REF.INTERNAL MATERIALS
Brand
Matured brand (e.g. Daikin, Mitsubishi) comprehensive distribution network;
premium market segments; AC project launch from initial stage from engineering offices/plant designers; at least 18 months for preparation of goods ready for shipments
New entry brand: medium low recognition, cut-in project process halfway by pricing issues, replace the original specified brands, urgent request of shipments (less than 4 weeks)
Project Initiation
Earlier stage project design: contractor or sub-contractor assignment takes
12months.
Final stage for AC system definition with certified system drawings: AC brands holders attend the tender and work out result within 4 weeks.
Types of Projects
Government project, Commercial center, Office building, and the alike: which need approval by relevant government
/construction department Contractors take longer time to conclude the job (>12months).
Private projects, medium-small scale offices/studio, renewal/replacement projects: there is no involvement of planners/consultancy; the contractors take no more than 4 weeks to close the job.
Products/Solution
Large Water/chiller system: requires integration with extra heating sources, such as gas boilers or solar system:
contractor takes minimum 6 months to close the job.
Medium Scaled VRF system or independent system without
integration: contractors finish the job within one month.
Exception For malfunction repair, partial system
replacement (1week) 4.2.3. What are the challenges for new AC brands entering the market?
The researcher points to internal personnel for answering this question with reliable insights. Hisense GmbH had experiences launching TV business years ago facing the branding challenges for all new comers. Meanwhile, Hisense Italia srl team witnessed the difficulties at primary stage. Interviewees believe top 3 challenges as (1) marketing investment & PR expenses, (2) company strategy& culture, and (3) technology. Table 4-8.
Table 4-8 Interview Data
What are the challenges for new AC brands entering the market?
Whether company strategy and culture are open to compete with leading
brands 16
Product line-up completion 14
Technology competence 15
Service platform is not up the standard of European market 12 Marketing investment and PR expenses for new company 19 Local logistics operational variables might be fairely high at beginning
stage 12
Collaboration in marketing
Mr. C. Stulman, sales director (brown goods) in Hisnese GmbH, “Hisense would have to face most difficulties in brand building as a new player, since German market recognizes brands as qualification”.
From past experiences with TVs, an effective way was to collaborate with local distributors who have the privilege in build-up customer confidence.
Mr. G.de Pietro, GM of Hisense Italia srl, “AC consultant has the most influential power, yet they concern most of their professional reputation and reluctant to introduce new brands by taking risk of product failure on job site.” Therefore, supplier must invest huge resources for their distributors in PR in the channel.
More evidence is found. At the beginning of 1990s, Daikin entered German market with collaboration of local distributor Frigotechnik, for whom, majority of manpower was spent on visiting engineering offices; as helpful support, Daikin participated very proactively with each seminar tutoring the technology of first VRF.
Later on, more events had been organized by Daikin Japan, e.g. free trip, factory tour, etc. At the end distributors benefit all from the end markets, and seized remarkable market share from traditional European brands.The internal 2013 marketing budget (Table 4-9) shared majority items with local partners instead of spending on its own.
Table 4-9 Hisense Germany AC BU. Marketing Program
Projects Item Content Budget
(EUR)
Sample show room Invite installers and
engineering offices for Loyalty trip in China Invite consultants visiting
factory for build-up
Project Marketing Consultants’ Design fee for project
PR fee with key consultant offices, max.1% project value.
12500 Daily
Total 46500
REF. Hisense AC marketing budget report (internal) 2013
The second challenging issue is company strategy. The sales team admits that current structure of German AC market leaves little space for new brand distributors, hence Hisense distributors starts the journey with great pressure from competitors. “Whether company
strategy and culture are open to compete with leading brands”
makes great difference.
According to Mrs. Fang, VP of Hisense International ltd. Co. “In the AC world, Hisense is a young brand yet inherited with top technology of Inverter and control system” Hisense portray its brand positioning in line with first tier Japanese brands in DX solution arena, however, outperforming in total cost management.” Figure 4-5 brand position
Facing competitive environments, Hisense distributors expect an integrated marketing function under collaborative program in order to protect margin. Known from the interviewed companies, who have more than 10 years presence on Germany AC market, the past decades shuffles the brand structure. Since beginning 21st century, most of the first tier brands started to set up local sales organization by either acquiring previous distributors, or suspended the contract. At meantime, most these brands developed national distribution network with their direct sales personnel, i.e regional sales manager and KA managers.
Few of them keep national distributors. With this flat distribution chart, the top brands saved the margin from middle layer distributors, and transferred it to price discount to the end market.
Figure 4-6 Three-Year Targets on German Market (NET USD)
The third challenging issue is Technology competence. The factual result found is that Hisense is already sharing a collaborative program with technological partners. Hisense production basis is joint venture with Hitachi; therefore, AC product inherits Japanese technology, and efficient product development process is around 6 to 12 months, including the inter-communication phase (with Japan) and R&D phase.
$2.000.000,00 $4.000.000,00 $6.000.000,00 $8.000.000,00
2013 2014 2015 2016
RAC LCAC VRF
Hisense also benefit from internal collaboration with its core business unit of telecommunication.
Technology for TVs/Smartphones provides optimal insight for development of intelligent AC goods in BMS application; the software development cycle is shorter and more flexible for management.
4.2.4 How to program buffer stock with the collaboration of regional distributors for slow moving/ technical featured AC products in European subsidiary?
Following the analysis of top elements in collaborative partnership between distributors and supplier, the researcher continue to collect opinions from potential partners of Hisense GmbH for illustrate the effective collaborative planning and forecasting programs.
As per Table 4-10, interviewees show major preference about European inventory collaboration with Hisense, as Collaborative European buffer stock program. The suggestion is to construct a visual European logistic centre with IT tools; meanwhile to construct an open information platform for project registration management.
(1) Visual European logistics centre is a jointly invested and managed physical warehouse located in Germany. Hisense distributors have free access to the IT program to acquire information about inventory, goods in transport and production. At meantime, the distributors are obliged for planning the inventory replenishment based on their accurate sales forecast.
By the time of factory shipment from China, Hisense issue invoices of 360 days of open account payment terms to individual distributors according to their forecasted purchase lists. Against the actual order confirmation from final customer, the distributor advice Hisense to note the corresponding articles for shortened payments. After that, the central logistics physically release the delivery, directly to the project site.
In many cases, transactions can be done among distributors. Upon order confirmation, only financial processes take place, while goods are physically transferred only once to the final customer. See figure 4-7
Figure 4-7 Visual European logistics centre
(2) Project Registration System is an effective software of information management, which effectively facilitate the project sales collaboration among Hisense and distributors. Based on the principle of AC project cycle, all distributors is encouraged to insert their project bidding news at first availability.
The purpose, at one hand, is to reserve the required articles in stock; on the other, is to avoid internal conflicts. In case more than one distributor is involved in the same project, or short of certain articles for more than one projects, Hisense decides how to coordinate the shipment with maximum benefit for the total value chain.
Table 4-10 Interview Data To what extend do you expect Hisense GmbH to create European buffer stock?
a=1.b=3. c=5.d=7.e=9 (>45 as effective)
A. Not at all b. would be helpful if does c. would be difficult if not, d.
Necessity 63
In which way could Hisense collaborate with programing the inventory?
>=50% as effective evidence
To construct a visual European logistics centre with IT tools 60%
To construct an open information platform for Project Registration
System 53%
Before launching the collaborative logistics platform, the players in the value chain present lineal buy-sell relationship, and the information flow based on multiple stages. Each stage plan and forecast for its own operation according to single source demand. However, after the collaborative program, Hisense GmbH and its distributors are responsible for bilateral planning and forecasting for total demands. The primary conclusion is that the collaborative logistics have positive impact on S&OP efficiency.
Figure 4-8 Distribution flow before and after collaborative program