A Case Study of CPFR Model Design for Facilitating Slow moving Air-conditioning Products Business Operation in Hisense GmbH

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Submitted in part fulfilment for the degree Master in Logistics Management

A Case Study of CPFR Model Design for Facilitating Slow moving Air-conditioning Products Business Operation in Hisense GmbH

Name: Y ZHOU(Jessie)

Student Number:0869613

Supervisor: Mrs. N.J. Osentoski-Monsma Group: MLM0912

Programme: MLM

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Acknowledgements

This research would not have been accomplished without the huge support and help from many people and organizations, to only some of whom it is possible to give particular mention here.

Above all, I would like to extend my gratitude to RBS MLM program and all professors who dedicate efforts training me with academic knowledge and problem solving techniques. I would thank for the enlightening and practical course design of the three consecutive blocks, which prepared me well for tackling problems in the real business world.

My special thanks go to Mrs. Osentoski-Monsma, my principal supervisor, for her personal support and great patience at all times, not to mention her advice and unsurpassed knowledge of 360 degree supply chain management. I thank her for generous help and encouragement from the moment I got the chance of internship, she is the most important mentor for my next future career life.

I would like to thanks to the case company, Hisense GmbH, for providing me with such a challenging yet inspiring research opportunity. I am extremely grateful for the instruction from colleagues of Hisense GmbH.

Mr. David He, Mr. Christian Stulman, Mrs. Jenifer Hallen, and all these friendly co-workers in Hisense group. They guided me throughout the research period, helping me with sufficient data collection and analysis. Without their vocational training, I could not have organized the interviews with limited time and resources.

I am most grateful to external interviewees from 15 professional AC distribution companies. Their proactive participation in the interviews and sharing their professional experiences reward with valuable information, which hardly be traced from official marketing report. Without their cooperation, I could not complete the research in time.

Last but not the least, I would thanks for all my school mates, friends from RBS, I appreciate your accompany and great support throughout the meaningful year.

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Executive Summary

With the development of modern logistics services, more Chinese manufactures are able to extend their S&OP function to overseas as subsidiaries. The purpose is to serve the demands of customers from local market. At meantime, the CPFR concept get popular for which a manufacturer and distributors could jointly fulfil the planning forecasting and replenishment for leverage the S&OP efficiency. The case company, Hisense GmbH, confronts a practical challenge to develop a collaborative program for its new Air conditioning business unit with involving German AC distributors. How to make sure that the collaborative project does facilitate S&OP efficiency in Hisense Germany? This paper brings in a research to find out the most critical elements that decide an effective CPFR application that benefit S&OP efficiency of slow moving/technical featured AC business.

To answer aforementioned question, the researcher explores the features of international supply chain management, AC product management, as well as the CPFR content in relation with AC value chain.

Based on the theoretical, a qualitative research is designed to collect relevant data for systemic analysis.

Selected interviewees come from international organization of Hisense Group (23 person/time), and from external potential partners (40 person/time). The internal interviews mean to discover the current S&OP platform and available resources cross divisions in the group, as well as to interpret the desired platform with embedded CPFR model better serving the customers in AC business field. External interviews interpreted market phenomenon, and raised requests for their benefits.

The researcher conducts semi-constructed interviews intended to resolve sub research questions in three sections. In the first section, Hisense distributors and employees are asked to portray the features of AC business, for better serving which, the company launches collaborative program. The findings are traits of the AC business nature in three aspects. (1), B2B distribution in Professional AC Channel is the most distinguished feature, which shapes the S&OP process greatly. On one hand, AC customers are B2B customers, and they focus on S&OP related factors rather than pure product. Top down concerns are a.

Lead-time & European inventory b. Supplier involvement in R&D c. Product quality & price terms and d.

Services &technical support from supplier. While on the other hand, AC sales are project based, which involve complex decision making process. Loop-shape sales process involves two additional decision makers who do not belongs to the capital flow, i.e. project planner and end user. (2) AC products characteristics require suitable S&OP process. AC product origins impact on logistics index, as well as marketing activities; AC product life cycle influences the VMI efficiency down the line; Product diversity

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leaves no place for “Standard AC solution” for global markets; AC products advancement requests are mainly driven by energy efficiency. (3) Special AC services standards. AC sales is project based, which give rise to unpredictable lead-time, long payment terms, and technical customization with R&D; AC is high technical products that needs full support during sales.

The second section is designed to discover various elements for which interviewees require collaborative program between distributors and suppliers. The findings include 8 collaborative topics, and for each of them, interviewees provide factual causes relevant to S&OP efficiency. Interviews disclose collaborative planning forecasting elements which stakeholders believed as important drivers to achieve efficient S&OP processes, for each of them interviewees elaborated the arguments. The 8 collaborative issues are:

• Collaborative product development

• Collaborative planning of inventory

• Collaboration in services

• Collaborative project sales

• Collaborative planning for sales

• Collaborative marketing

• Collaborative manufacturing plan

• Collaborative planning for transportation

The last section means to examine the outcome of collaborative programs, so that researcher could derive the key elements that influence S&OP efficiency in Hisense GmbH. Based on analysis of top elements in collaborative partnership between distributors and supplier, the researcher found the favourable suggestion, that is to construct a visual European logistic centre with IT tools; meanwhile to construct an open information platform for project registration management. The calculation date proves that collaborative programs enable cost reduction for both distributor and supplier. At the end, 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. These 3 key elements are the answers towards the main research question, that they are the main factors benefiting AC S&OP efficiency inside Hisense GmbH, and that these three aspects coexist and influence the performance of slow moving AC business launch on overseas platform.

As recommendation, implementation must concentrate and serve for the better outcome of their performances. Hence, researcher proposes recommendation on the collaborative program implementation by following CPFR road maps as in five steps; execution phase derives into 9 step model. Also, evaluation measures are recommended for long-term business operation, so that the partners could realize potential

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risk and prevent from happening in advance. The researcher suggests create collaboration scorecard to measure performance of collaborative programs against mutually agreed target. To control the risk, executive team should also take responsibility to review the business process, e.g. whether forecast change dramatically. The partners should also supervise the CPFR technology advancement, and introduce new managerial tools into their collaborative program.

The recommendation contains limitations for the project is undergoing by the end of the research;

nevertheless, this research has instructive significance for companies striving for globalization and localization. It inspires international practitioners in participating overseas operation proactively, exploring unique path of brand building, and leveraging overall efficiency of the entire supply chain. This should not be a topic only among Chinese producers, but valuable for every enterprise on its way expanding distribution network.

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Table of content

ACKNOWLEDGEMENTS ... 2

EXECUTIVE SUMMARY ... 2

TABLE OF CONTENT... 6

CHAPTER 1 INTRODUCTION ... 8

1.1CASE COMPANY ... 9

1.2CHALLENGE SITUATION... 9

1.3PROBLEM DEFINITION ... 10

1.4SIGNIFICANCE OF THE RESEARCH FOR HISENSE GMBH AND THE ALIKE ... 10

1.5RESEARCH OBJECTIVE ... 11

CHAPTER2 THEORETICAL FRAMEWORK ... 14

2.1CPFR REFERENCE MODEL ... 15

2.2PRODUCT CHARACTERISTICS ... 18

2.3INTERNATIONAL MARKET MANAGEMENT ... 21

2.4SUPPLY CHAIN MANAGEMENT ... 23

2.5SUMMARY ... 24

CHAPTER 3 RESEARCH METHODOLOGY ... 25

3.1RESEARCH APPROACH:DEDUCTIVE ... 25

3.2RESEARCH METHODOLOGY ... 25

3.4RESEARCH POPULATION: SAMPLING FRAME ... 26

3.5DATE COLLECTION AND ANALYSIS METHOD ... 27

3.6LIMITATIONS ... 28

CHAPTER 4 EMPIRICAL FINDING ... 30

4.1TRAITS OF AC BUSINESS NATURE ... 30

4.2KEY ELEMENTS IN COLLABORATIVE PROGRAM ... 38

4.3COLLABORATIVE PROGRAM IMPACT ON S&OP EFFICIENCY ... 48

4.4SUMMARY ... 52

CHAPTER 5 RECOMMENDATION ON CPFR IMPLEMENTATION ... 54

5.1CPFRMODEL IMPLEMENTATION ... 54

5.2EXECUTION ... 58

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5.3EVALUATION IN BUSINESS LONG-RUN ... 58

5.4SUMMARY ... 59

CHAPTER 6 CONCLUSIONS ... 61

GLOSSARY ... 63

BIBLIOGRAPHY OF REFERENCES ... 64

APPENDIX I INTERVIEW LIST ... 66

APPENDIX II. QUESTIONNAIRE GUIDE LINE-INTERNAL ... 69

QUESTIONNAIRE GUIDE LINE-EXTERNAL ... 70

APPENDIX III. INTERVIEW RESULTS ... 72

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Chapter 1 Introduction

Since late 1990s, global manufacturing hub has been established in South East Asia, known as China centered production basis for labor intensive products, e.g. home appliances, electronics, etc. At the mean time, European and American enterprises took decades to transfer their business mode from local production into international outsourcing and set up long-term OEM or ODM collaboration with Far East partners, which had been a golden chance for most eastern factories enhancing their comprehensive competitiveness in supply chain management. Due to the rapid growth of productivity of Asian producers, by the early years in 21st century, top manufacturers initiated globalization movement by stepping out of their home countries and setting up oversea branches on Europe continent. This new trend brought opportunities of companies’ global business expansion; meanwhile, it put subsidiaries in front of great challenges for oversea S&OP. management, which is a common topic for executives in international operation, “think global, act local”.

One key difference between serving as ODM/OEM manufacturer and acting as oversea branches running brand building on its own organization is that the latter mode requests much more strengthens in the coordination with frontier distribution channel hence to collaborate with parties from upper stream in the supply chain in their home countries. In other words, oversea subsidiaries play as intermediate between distributors and factories to make sure a profitable and solid business operation.

A recent theme approaching above scenario among practitioners is the implementation of Collaborative Planning Forecasting and Replenishment (CPFR) model, which is substantially an initiative that facilitates the reengineering of the relationships between trading partners and thus transactions.

This research is based on the background that many Chinese enterprises pursue for effective local S&OP after their oversea subsidiary foundation, and applies into the case study with theory framework relative to Collaborative Planning Forecasting and Replenishment (CPFR).

The research objective is to elucidate why and how this certain type of company, like Hisense GmbH could benefit from designing a suitable CPFR model and implementing the model effectively on the way achieving its esteems and sustainable development global market.

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1.1 Case Company

Hisense International Co. ltd, a Chinese home appliance manufacture with total turnover of 12.8 billion USD in 2012 (China excluded). This research is carried with Hisense GmbH, wholly owned subsidiary in Germany, which operates independently as oversea importer of around 300 types of electronics products and home appliances that produced from Hisense factory in China. Hisense GmbH has 19 local employees (3 Chinese and 16 German) in 5 functional departments, i.e. HR, Finance, Marketing & Sales, Logistics &

aftersales support, Product Management.

Paralleled with other five subsidiaries (Italy, UK, Spain, Hungary and Belgium) around Europe, Hisense Germany was established in 2010 at Düsseldorf, conducting private brand product distribution via electronics retailers in Germany. The product ranges includes Flat TVs, Mobiles, Pads, Refrigerators by the time when this research is initiated. Total sales turnover is 28 million euro in 2012, and being forecasted to achieve 31 million euro in 2013. The company strategy highlights “Brand Globalization”, international brand awareness based on superior quality and best service in the industry. Other than scale growth, the company is in favour of branded products sales ratio and market share, which defers greatly from universal policy of OEM/ODM manufacturers.

Under the strategy targeting premium market with top products, the platform of founded solid and integrated with unified management system from Hisense production planning down the line to retailer inventory supervision; it also enable access of resources from product R&D, technical support, and risk management.

With 4 years of operation, Hisense GmbH has developed its effective mechanism in local S&OP management in Germany.

1.2 Challenge situation

Based on existing organization, Hisense GmbH plans to import & distribute Air Conditioning (AC) products via an independent channel from electronic home appliances and white goods. To fulfill the request of potential clients for slow moving & technical featured products, the company decided to invest in European buffer stock, at mean time to implement CPFR model in inventory management.

There is obvious difference of distributing AC products than television and other white goods such as refrigerator and washing machines, which derives from the nature attributes of the products and German consuming market.

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a. AC products flow through professional channel, e.g. professional distributors, AC installers, contractor of construction projects, etc. The distribution network is much more complex and less transparent than retail markets e.g. electronic retailers Media-Market, Saturn; therefore, Hisense GmbH is facing difficulties that there is no access towards accurate market “sell-in” and “sell –out” data.

b. AC products sales are seasonal and less predictable in advance; therefore, Hisense GmbH bears entrepreneurial risk. To be specific, local distributors prepare orders in November/December in the year before; they expect the arrival of shipments by February/March when the season starts. However, by the spring period, the players are not capable of foresee the weather in June, which means, “cold summer” (as in 2008) might different results in high inventory along the distribution channel.

c. AC products application is more in commercial projects in Germany rather than residential /household purchase in Southern European countries, which makes the product sales mode as “project based”;

therefore, the ordering cycle is unpredictable, i.e. urgent projects might request equipment delivery within 7 days; while regular construction projects could last for 6-18 months. Irregular lead-time is a huge challenge for Hisense GmbH, who is used to manage inventory based on regular forecast from retailers.

d. Complexity of overall S&OP management due to the nature of AC products distribution on internal basis.

As pre-described in the value chain in the case company, that SC management crosses multiple entities and wide geographical span.

1.3 Problem definition

As above elaborated the challenges confronted by Hisense GmbH team, to launch AC products on current operation platform requires reengineering forecast and planning model with maximization of distributor involvement, in order to serve the demands from AC customers on local market. Hence the research describes the main problem that brought up by executive manager of the company: the current S&OP management mechanism for existing product line is not applicable for the new launch of AC business sector due to the product/market nature*(which will be explained in detail in Chapter 2). An in-depth research must be conducted to answer how Hisense GmbH could introduce a CPFR model particularly suitable for a successful new launch of AC products.

1.4 Significance of the Research for Hisense GmbH and the alike

The research will unveil the main factors that impact on S&OP efficiency by launching CPFR model, which benefits Hisense GmbH and the companies alike from four aspects. Generally speaking, Chinese companies are usually reckoned as producers, who ship out the goods and close the deal on their oversea operation, where they are naturally cut out of the distribution stream down the line. As a result, there is lack

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of control on channel inventory, quality feedback from end users, brand positioning among competitors, dynamic data from the industry, etc. By appointing oversea branch taking responsibility of the launch of CPFR with distributors,

a. Companies would participate to the oversea operation proactively. Collaborative is the key of partnerships between subsidiary and local distributors that makes the strategy of most reasonable according the market demand, i.e. product lineup, price, policy, etc.

b. Companies play instructive role on marketing activities. Unlike conventional business model, oversea branches have great control on brand position thanks to the share of information database. The control power could avoid them being blind bout random campaign of entry-level brands.

c. Companies prevent risk of resources waste by sufficient forecasting. Due to the far distance from production basis towards end market, accurate forecast would save time/energy on product R&D, logistics, marketing, etc. Companies would leverage overall efficiency of the entire supply chain. It’s a significant stage before Chinese companies reach their rapid growth period as multinationals.

1.5 Research Objective

The research aims to provide case company sufficient evidence for develop and implement the suitable CPFR model for the company and its distribution network in order to improve the S&OP efficiency. The researcher takes a full-time internship (from May, 1st 2013 till the closure of writing research paper), as assistant sales manager coordinating with external business development and internal logistics operation.

The field experience could assure a rational research structure and accurate data collection during the process. See below figure of AC value chain. Hisense china production bases export finished goods on container basis to Hisense subsidiary oversea. Hisense GmbH supply the local market via distributors and installers, both of them keep buffer stock to fulfil the market demand. Warehouse of individual distributor serves only its corresponding customers down the line; while there is no internal flow of goods across distributors or installers.

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Research Questions Main Research Question:

The managerial problem defined in the case brings the main question that the paper wants to answer: What are the critical elements that decide an effective CPFR model application in Hisense GmbH in order to improve S&OP efficiency of slow moving/technical featured AC products?

Sub Research Questions:

1. What are the main differences of customer behavior and partnership between retail channel and professional AC channel?

2. What are the key factors could facilitate the AC S&OP efficiency?

3. How much does AC product S&OP rely on collaboration of regional distributors? What are the main drivers?

4. What are the key influencers to purchase cycle of AC distributors?

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5. What are the challenges for new AC brands entering the market?

6. How to program buffer stock with the collaboration of regional distributors for slow moving/ technical featured AC products in European subsidiary?

7. What is the desired value chain under collaboration?

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

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Chapter2 Theoretical Framework

This chapter elaborates the literatures applied in the research. Due to the fact that nature of this research is to explore a solution to the pre-described challenges in the case company, hence, the researcher includes the relevant theories that could support the research progress and sorts out into below chart, with the target to answer the main research questions. The company case has main features: a. Multinational Company’s over sea operation, b. branding business with local platform (on contrary of brand labeling manufacturing), c. new business units with less historical evidence. d. Time bounced project started with the research. In the following sub chapters, literatures are elaborated according to the order of relevancy.

Theoretical frame: (Secondary Data collected by academic theories and Industrial research reports)

Oversea branch: organizational Platform

Customer Satisfaction Evaluation & Risk Control

S&OP Structure of Slow moving & Technical featured AC products. (Data from Industrial research &reports)

Launch of CPFR model in case company Porter 5 forces

AC products distribution Channel Multinationals’ operation VMI International supply chain management

Service Package

Stakeholder value

Total Cost Management

KPI Evaluation

9 Steps of CPFR

5 stages of implementation

What are the critical elements that decide an effective CPFR model application in Hisense GmbH in order to serve the customers’ demand of slow

moving/technical featured AC products?

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2.1 CPFR reference model

2.1.1. Evolution of CPFR

To retrieve the historic environment when CPRF was initiated, the fierce market competition requires global enterprises constantly shorten lead-time, cut cost, while improving quality of products and services.

Therefore, tighter collaboration among manufacturers, distributors and retailers is desired widely. Hence, a new topic rise from conventional Supply chain management, that, how to form an innovative partnership across each functional party in the supply channel? During the period of 1980-1990, the Vendor Managed Inventory (VMI, by Gerber, 1991) and Collaborative Replenishment Planning (CRP) have been introduced to supply chain management arena, which facilitated the evolvement of CPFR. At meantime, SCM developed ECR in the year 1993, where all participants in the SC are enabled to synchronize database via IT manner; in accordance, the entire supply chain pursued for an integrated mechanism to enhance efficiency and proficiency. Finally in the year1995, the term CPFR (Collaborative Planning Forecasting and Replenishment) occur, integrated two very important perspectives together i.e. Information Exchanges and SC collaboration.

Figure 2-1 Evolution of CPFR

The first application was carried out in Wal-Mart in its retail operations, under the assistance of its supplier Warner Lambert, SAP and Manugistics, and consultant Benchmarking partners. The mechanism aimed at enhancing demands fulfillment ratio by jointly forecasting of products of sales, including production planning, inventory planning, distribution and sales programing. The result was fairly successful; when after, VICS dedicated efforts in study of CPFR model, hence more and more enterprises implemented it for inventory reduction purpose.Williams (1999) described how Procter & Gamble (P&G) took advantage of CPFR in a

SUPPLY CHAIN ECR(1993) Supply Chain

VMI(1980) CRP(1990) CPFR(1995)

Information SC collaboration

Demanded Facilitatin

Inspired Promoted

Evolution

Facilitatin

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supply chain to create value for the corporation, trade partners, and consumers. Foote and Malini (2001) found that the incorporation of Data Warehouse with Wal-Mart in CPFR enabled more accurate forecasting of operational processes. Later on CPFR model has been challenged and verified in numerous academic reports, e.g. Fliedner, “CPFR” an emerging supply chain tool (2003), and Holmstrom (2002), “new solutions needed for mass collaboration”.

2.1.2 What is CPFR?

CPFR is a collaborative business practice that enables partners to have visibility into one another's demand, order forecast and promotional data to anticipate and satisfy future demand (VICS,1995). Literally interpretation comes to the four core attributes: Collaboration, Planning, Forecasts, and Replenishment, while all of the four are done a systematic process of information and knowledge sharing.

Table 2-1 Definition of CPFR

Items Features Contents Relevant to Case

Collaboration -Common objective among participants along the stream of supply chain.

Long-term commitment, Open information channel, common corporate strategy, common incentive mechanism

-Distributor -Oversea subsidiary Planning -Collaborative planning

-Collaborative financial Mgt.

-Promoting planning

Product, Branding, Segmentation, Sales volume, order fulfillment, pricing, safety inventory, gross margin.

Product entry/phase-out, inventory policy

-Air-con Business features

-Long distance supply

Forecast -Biliary task

-Periodical feedback and correction

Mutually agreed forecast, improvement of accuracy radio, increase inventory mgt.

effectiveness and efficiency.

-Features of Air- con purchase /sales cycle Replenishment -Time sequential demand

transferred into forecast -Exception radio

Respect to order process cycle, minimum order quantity, purchase habits, forecast deviation, transportation, etc.

-Improvement in the future

CPFR goes beyond internal system of information sharing out to trading partners; therefore, investment in IT manners and tools are required, such as Warehouse Management Systems (WMS), Forecasting / APS systems, Enterprise Resource Management (ERP) systems, Materials Requirements Planning (MRP) systems, and Customer Relationship Management systems. In practice, CPFR drives the best performance of sales and marketing function in relations with supply chain planning and execution, in which way, product availability can be increased while reducing inventory, transportation and logistics costs.

2.1.3 CPFR Implementation

The purpose for enterprises’ implementation of CPFR is to 1) provide clarified business-to-business collaborative “P”, “F” and “F” standard (Nine-step process Model), 2) introduce Roadmap of CPFR (5 steps of implementation), 3) and to customize evaluation metrics, and Key Performance Indicators.

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The case company aims to employ 5 steps roadmap, and the research builds up the business case with Step 1. Evaluate the current conditions, Step 2. Define Scope and objectives. The researcher also conducts primary preparation for collaboration (Step 3). Step 4. Execute of the Nine-step process model (see figure) is not carried out during the research project, yet Step 5. Assess Performance and Identify Next Steps, has been included into Data analysis for complete the Findings.

Figure 2-2 Nine Steps Process Model

2.1.4 CPFR Impacts on S&OP

The implementation of CPFR model gives rise to impacts on Sales& Operation system. There are five aspects to locate the influence. First of all, it changes Partner Relationships from traditional buyer and seller to flexible partnerships; meanwhile, it facilitates deeper collaboration through interdependencies, joint systems & processes. Secondly, it affects the Inventory. Successful implementation reflects a. decrease in inventory levels and safety stocks, b. decrease in storage & financing costs, c. decrease in obsolescence.

Subsequently, it results in the improvement in company’s financial statement, due to the fact that a.

Reduction in stock-outs and opportunity costs, b. Promotion Efficiencies, c. Sales increase from improved customer service. The forth impact is on the process efficiencies, a. Improvements in forecast accuracy, b.

order management, c. purchasing, d. inventory control, e. production labor. The last impact arrives at the Transportation management, a. Strategic Rate Management, b. Tactical Rate Management, c. Less than Truckload (LTL) Consolidation, d. Capacity Utilization and e. Demurrage.

More importantly, many business process executives have realized that to link the customer’s perspective into their supply chain could assist in driving efficiencies back through their on-going corporate sales and operations planning process (S&OP). (Baumann, 2010) Katerina Pramatari stresses that CPFR as the latest business practice aims to ensure that there is always enough quantity to meet consumer demand,

1.Develop Front End Agreement 2.Create the Joint Business Plan 3.Create the Sales Forecast

4.Identify Exceptions for Sales Forecast 5.Resolve/Collaborate on Exception Items 6.Create Order Forecast

7.Identify Exceptions for Order Forecast 8.Resolve/Collaborate on Exception Items 9.Order Generation

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while maintaining optimum levels of stock across the supply chain. The essence of CPFR is about utilizing technology capabilities and information sharing to support trading partner interaction and collaboration in meeting consumer demand (Pramatari).

2.2 Product characteristics

2.2.1. Air conditioning products classification

In the case company Hisense GmbH, the CPFR lies in its new business unit of Air conditioning products (hereafter referred as “AC”). According to the classification based on The Customer Value hierarchy, the product is embedded with characteristics crossing five products levels.

Product against customer value hierarchy

Definition In the case company/AC

Products(from b2b perspective)

First level Core benefit The service or benefit the customer is really buying.

Cooling/heating solution to distribute.

Second Level

Basic Product The marketer has to-turn the core benefit into a basic product.

Equipment sold and installed in place with described specification.

Third Level Expected Product

A set of attributes and conditions buyers normally expect when they purchase this product.

Good performance of cooling/heating capacity, Intelligent function.

Forth Level Augmented product

The marketer prepares an augmented product that exceeds - expectations.

Better quality& services among brands. Highly reputed brand recognition.

Fifth Level Potential Differentiation arises on the basis of product augmentation.

Innovated solutions /additional value added services.

According to product classification, AC products belong to Durable goods, while combined with Services, i.e.

Every AC system should be sold together with its Services of installation and maintenance. Therefore, AC products normally require more personal selling, and service, command a higher margin, and require more seller guarantees; at meantime, it requires more quality control, supplier credibility, and adaptability.

Besides, AC products bear the features of Industrial goods, which are categorized by its production process and their relative costliness. There are three groups of industrial goods: materials and parts, capital items, and supplies and business services. AC products cross all 3 categories. From the position of AC distributors, they are trading AC equipment’s, components and parts; additionally, they are supplying the aftersales maintenance as services. From the perspective of AC end users, such as project owners, they are purchasing capital items since AC equipment is usually long-lasting goods that facilitate developing or managing the finished product. E.g. a hotel owner invests AC system into the construction, which facilitates

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the function of the final products and service (hotel accommodation). Installations are major purchases.

They are usually bought directly from the producer, with the typical sale preceded by a long negotiation period. The producer’s sales force includes technical personnel. Producers have to be willing to design to specification and to supply post sale services. Advertising is much less important than personal selling.

Air conditioning products are durables combined with Services. The core benefit for the end user is to cool or heat certain ambient by the RCC (reversed calorie cycle) system of intermediate (Figure 2-4), which could be different types of refrigerants, or water. In other words, the end user bought the machine to carry the heat from indoor environment to the outdoor environment, or the other way around. From the perspective of B2B business format, AC producers provide an AC solution as “AC products” to the distributors, who in turn resell to households plus the services of installation. Installation services are equally important as product itself, because it guarantees the products’ delivery of core benefit.

Figure 2-4, Ac working principle Figure 2-5, Energy label

2.2.2. Impact of AC Product Characteristics on Supply Chains

Supply chains are typically considered to consist of many stages across several organizations starting from raw material sources through component production to manufacturing and further on via distribution operations to B-to-B customers and consumers. Dr. Bask analyzed what the product characteristics would have as impact on the structure and design of supply chains (Bask, 2013). Most enterprises formulate the specialized supply stages according to the features of the products or services they are producing or trading. In accordance, the entire SC structure is labeled with particular items, from purchasing, manufacturing, and distribution till logistics services.

As defined in previous subchapter, AC products embedded attributes, as industrial products and services, shaped the linking among each participant in the value chain, as well as their inter-relationship. To simply

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put, there exist nature difference between supply channels of normal durables (E.g. Home appliance) and AC equipment.

For normal durables products/comedies, the supply channel is featured as horizontal movements, which means the goods are physically moved via any of the below 3 types of flows (figure 2-6). The essential requests from similar products characteristics are to “Create an effective physical distribution network”. Key factors allocate in (1) Material handling, (2) Warehousing, (3) Just-in-time production, (4) transportation,(5) automation.

Figure 2-6 Normal durables distribution flow Figures 2-7 Value Chain of the AC

Diversely, for AC products, the above value chain has been overwhelmed by the loop shaped value chain for its complexity and multiple decision making process. The supply chain members are expected to have powerful control power on relationship/information management. The cost of physical movement of AC units has comparatively little impact on the total value add-up to the project itself; on the contrary, the accuracy of information management would affect much on S&OP efficiency. The research will investigate in detail of each stage in the AC supply chain and disclose the main drivers behind the value chain.

2.3.4 Product Management

Product management is another key issue in the research business case due to the fact that AC products are built-in with high technology and longer product life cycle. Meanwhile Hisense takes major responsibility of product R&D, production, and cross boarder transaction; hence AC product management relates to forehead view in product development, legal regulations, cost control on manufacturing in accordance with market pricing, and selling points edits, etc. The research respects to the true value of product management, and what makes it so critical to company success.

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In the AC industry, product management reflects top four issues as a cyclic model a. Legal, b. customer services, c. R&D, d. Engineering& Manufacturing. The rest issues are comparatively less important in the main stream of AC evolution (Figure 2-9). The reason is that AC products buyers and end-users are separate groups; therefore, there is a reciprocal information flow with the distribution channel. AC producers develop AC product for coming season, and ship out the products to local distributors’ network, where installers inspect the products from marketing, legal, and application perspective.

Figure 2-9 Stream of AC Product Evolution

2.3 International Market Management

This research also involved international market management theories due to the fact that Hisense AC CPFR project is initiated under cross boarder scenario, where the Hisense AC as a novel international branding business landed on German market as new comer. There are several marketing related issues that influence the findings in the research, for which research designer needs to take into consideration general marketing theories during the data analyses.

2.3.1 General Marketing Analysis

First of all the introduction of Hisense AC business unit into the operational platform should involve the general market analysis for preparing the marketing strategy. Porter’s 5 forces model is one of the most recognized frameworks for the analysis of business strategy. The researcher applies this theoretical framework during interview, describing the attributes of the particular AC industry, analyses opportunities and threats and explains the position of Hisense AC in the current industry.

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This model comprises of an analysis dependent on 4 entities external to the firm and the fifth force: the Industry structure. These forces are defined as follows: (1) The threat of the entry of new competitors, (2)The intensity of competitive rivalry,(3) The threat of substitute products or services, (4)The bargaining power of customers, (5) The bargaining power of suppliers. Hisense, as new entrant competing existing AC players,

Figure 2-10 Porter’s 5 forces model

2.3.2 Brand management

This research has involved brand management methods because Hisense AC is oriented as Branding business (on contrary of OEM/ODM business) in Germany. Therefore, the branding strategy goes throughout the entire business case as an indicator of determining S&OP policy. Brand Equity model (Brandt and Johnson, 1997) distinguished the brand attractiveness in the “the hearts and minds of customers.”, hence influences the customer-oriented brand building (KELLER, 2001). What’s more significant, brand equity is the essential lever of profitability because it represents the value of the brand in the marketplace, independent of added features and lower price (both of which cost the company money).

Brands with strong brand equity can a. Command premium prices, b. Capture and maintain market share, c.

Support new line extensions, d. Attract investors, e. Fend off new competitors.

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2.4 Supply Chain management

2.4.1. SCM in the business case

To manage the SC means to control the vertically networked companies and their activities, according to Stevens (1989), two flows, those of material and information, consist of a series of actions, such as planning, coordinating and controlling of goods or services from the supplier to the customer. Hisense Germany launching AC business units, mainly inserts a linkage that connects the up and downstream activities and process to produce value in the form of products and services for ultimate customers.(Christopher, 1992).

The primary purpose of introducing CPFR model into Hisense Germany platform for AC business unit is to fulfill the ultimate request of AC distributors by managing a network of interconnected business.

(Harland,1996). Systemic and strategic Coordination of the traditional business functions and the tactics across these business functions (Mentzer, 2001) is the essence of the particular company functionality.

Therefore, this business case is substantially a SCM study across businesses within the supply chain, for the purposes of improving the long-term performance of the individual companies and the supply chain as a whole.

2.4.2 The objective of SCM

In the business case, the ultimate objectives of SCM can be concluded as following three sectors: (1) Maximize the customer satisfaction, (2) Reduce the total cost of local operation, and (3) Optimize cross boarder logistics performance.

Companies should implement and develop an optimal and flexibility logistic strategy and satisfy constantly changing supply chain consequently ensure the service level is maintained and not be depressed. To complete a logistic strategy, it must concern on three important perspectives. That includes inventory strategy, transportation strategy and location strategy (Gulay, 2008).

2.4.3 Business process integration

Supply chain business process integration involves collaborative work between buyers and suppliers, joint product development, common systems and shared information. According to Lambert and Cooper (2000), operating an integrated supply chain requires a continuous information flow. However, in many companies, management has reached the conclusion that optimizing the product flows cannot be accomplished without implementing a process approach to the business. The key supply chain processes stated by Lambert (2004) are:

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Figure 2-11 SC process

2.5 Summary

To sum up, this chapter illustrates the theoretical frame of the research. In the business case, to discover the key factors that influence the CPFR model the most, researcher approach the target following several stages. Firstly of all, Hisense AC as a brand new business activities being launched by its oversea organization; therefore, executive managers must have full picture of local buyers’ bargaining power and competitors’ reaction. Secondly, AC business is located in professional field, where professional customers’

value is realized different than that of mass consumers; hence brand management and product management must be addressed in the total supply chain management. What’s more significant, the CPFR model means to improve the entire S&OP efficiency, research focus on comparison of actual demands from external partners against the key decisive of CPFR implementation process. If the external data collected coincide to a great extent with the theoretical factors, the research could conclude the answer to the main research question.

Customer relationship management

Customer service

management Demand

management Order fulfillment

Manufacturing flow management

Supplier relationship management

Product development and commercialization

Returns management

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Chapter 3 Research methodology

3.1 Research Approach: Deductive

This research applies deductive approach, for which, the reasoning works from the more general to the more specific as “Top-down” waterfall. The researcher begins with THEORY; based on past experience, literatures and theories study, HYPOSIS is generated as theoretical frame of logistic strategy, supply chain management and forecast system. Afterwards, OBSERVATIONS are carried out during the researching process to verify the premises, and to draw CONFIRMATION.

Hisense GmbH launches AC business on oversea market, the theoretical frame suggests to involve investigations of international market management, e.g. Porter’s five force theory defining the competition background, Product management theory describing the features of slow moving AC products. The hypothesis is that “Oversea branch operation and AC products supply chain characteristics would influence the later launching of CPFR model”. Furthermore, previous researches proved that CPFR post positive impact on the S&OP efficiency, customer satisfaction and risk control. In the interviews, every aspect would be confirmed or better explained by the interviewees when answering related questions. By the end of the thesis, researcher would conclude the most influential factors that Hisense GmbH has to take measures to comply with, or else, to accept the possible failure of the project.

3.2 Research methodology

Longitudinal single embedded case study

Rather than using samples and following a rigid protocol to examine limited number of variables, case study methods involve an in-depth, longitudinal examination of a single instance or event: a case. They provide a systematic way of looking at events, collecting data, analyzing information, and reporting the results. As a result the researcher may gain a sharpened understanding of why the instance happened as it did, and what might become important to look at more extensively in future research. (Bent Flyvbjerg )

The research will concentrate on the affect elements of Hisense GmbH Aircon Business unit’s operation with its local distributors. The desired CPFR model from both parties will be a main research context.

Besides, it will involve multiple analysis of the business operation platform such as product specification, unique distribution channels, and logistic strategy etc.

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The research questions involved are mainly “how” and “why” questions, aiming for investigating the causes and reasons to the existing difficulties within the case company; therefore, as suggested Yin (1981) and Collin (2010) in different ways that case study as the preferred research strategy for the study of this single Case Company. Single case study research strategy is chosen as it develops detailed analysis of a program or event. Case study is best for investigating a contemporary phenomenon within its real-life context, especially when the boundaries between phenomenon and context are not clearly evident. (Yin, 1981a, 1981b)

Qualitative Research

This research is designed to disclose the essences of a topic and to figure out answers towards research questions by the end of the research; besides, Qualitative approach is concerned with the opinions, behaviors or attitudes of the subjective assessment (Creswell, 2007); therefore, the researcher applies qualitative research.

As defined in the first chapter, the main research question (MRQ) is What are the critical elements that decide an effective CPFR model application in Hisense GmbH in order to improve S&OP efficiency of slow moving/technical featured AC products?

Sub questions reside on 3 stages (1) what are the features of AC S&OP, (2) what elements in supply chain are relate to collaboration between distributors and suppliers, and (3) how does the collaborative elements impact S&OP efficiency.

The survey has been carried out in the form of individual and group interviews as semi-structured questionnaire guidelines during business development meetings. Each interviewee was well selected for answering the most suitable questions according to his professional experience in field (appendix II). The purpose is to collect sufficient data supporting the upcoming arguments answering the MRQ.

3.4 Research population: sampling frame

The research applies Non-Probability Sampling because Hisense GmbH in the single case study selected only those who would become Hisense’ distributors, that their answers and reacts are more conducive to the research questions. Besides, the researcher prefers this sampling method for the limitation of time and money resources. More importantly, the hypothesis development requires constant observations and verifications till results have been concluded with specific customers’ projects.

Based on above criteria, the researcher locates target interviewees of two groups, a. internal employees and managers from Hisense GmbH and Hisense Group, and b. external distributors of potential

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partnerships on local markets. Seen from the appendix, the researcher has conducted 40 person/time interviews from 15 external companies, and 23 person/time interviews from 3 internal organizations of Hisense group. i.e. Hisense factory(R&D), Hisense Subsidiary in Germany and in Italy, among which, the last organization has had one year experience launching the CPFR model in AC business operation.

The internal interviews mean to discover the current S&OP platform and available resources cross divisions in the group, as well as to interpret the desired platform with embedded CPFR model better serving the customers in AC business field. By sort-out primary data collected from frequent questions & answers, the researcher could draw a list of bottom lines for various commercial terms, and take them into consideration before customizing questionnaires for the external ones.

External interviews have been carried out during the commercial meeting, where both supplier and buyer raise requests for their own benefits, as well as negotiate for drawing agreements of long-term partnership.

Preferably, the interviews cover broader dimension than CPFR related topics, which would bring back deeper interpretation of market phenomenon. For instance, the companies that have been selected for interviews are mostly professional AC distributors of long presence on the market, who have sufficient experiences with top AC manufacturers from Japan and Korean, and who have had insight of European branding business in AC industry. They also take the meeting as a chance to match their expectations of Hardware, software and corporate strategy from potential new supplier, i.e.Hisense GmbH.

Both external and internal data collection has been guided by the practical framework (Primary Data Collected from case company) illustrated in Chapter 2. By thorough analysis of the interview results, the research expect to read some common goals from supplier and distributor, i.e. long-term partnership and sustainable growth, brand building and final customer satisfaction, etc. At meantime, to achieve the common goals, they both have to face the gap from what supplier could provide and what buyer would request. Both parties would explain why and how to achieve a compromise; while these points of compromise are exactly the critical answers to the main research question.

3.5 Date collection and Analysis method

This research relies on qualified data collection and effective analysis of the primary and secondary data. Primary Data collected for this single case study come from different data sources. Primary data mainly come from open interviews and group interviews both internal and external groups. Besides, sources include field observations and participant observations, company documents, archival records, and

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physical artifacts. Secondary Data are also collected and used to support the thesis. The sources of those secondary data are mainly from Industrial reports (GFK, JARN), books of literature, academic articles, and company reports.

The researcher apples the most common Data analysis method as used in qualitative research, i.e.

Taxonomy and Logical Analysis/Matrix Analysis. The sub research questions extend to multiple dimensions in supply chain management, e.g. Particular product & distribution channel management, brand building on oversea market, etc. Taxonomy method works well for sorting out data into a complex classification of multiple levels of conceptions. Shown in the appendix III Interview results, the interviewees are given multiple choices or open questions to reflect sub research questions. The research respects to 3 principles when analyses the data: i. rank according to companies’ credibility score, ii. Most frequently repeated answers weigh the top importance, iii. Higher total scores (sum of all individuals) taken as more relevant.

E.g. companies with longer history in professional channel (for SQ2) provide trustworthy answers than the others; highly repetitive factors (for SQ3) with higher total scores can be concluded as answers to the questions.

Matrix Analysis is also applied for deriving the recommendation of proper CPFR process, because it is an outline of generalized causation, in the format of flow charts. In other words, the external interviewees elaborates a series of requests from buyer perspective, hence, the buyer has to transform all the underlying causes into its new process to fulfill the requests.

3.6 Limitations

There might be limitations of the research, i. Biased response of the interviewees, ii. Difficulties in generalization, iii. Assumptions & calculations, iv. Access to detailed information, and so on.

i. The external interviewees are potential business partners; hence, they respond the questions under the condition of business negotiation rather than objective comments. Each of the interviewee might highlight the points of their own benefits and overlook those for general proficiency; hence, there might be additional factors missed in the final results.

ii. This case study bases on limited interviews, from which, findings have been analysed for the practical application in the case company. The critical factors for collaborative programs might not be generalized for the case of other companies with various situations. There should be consistent dialogues with potential partners to verify the findings.

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iii. The questionnaires contain assumptions of researcher, e.g. interviewed companies with longer history in AC professional channel are assumed as more credible than the others. Calculations in data analysis meant to draw qualitative conclusion, therefore, data statistics are limited.

iv. The external data is mainly collected from dialogues; the researcher could hardly get the original information in details, such as financial statement from the distributors.

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Chapter 4 Empirical Finding

In this chapter, the researcher elaborates the empirical finding from systematic survey and five months observation of external and internal parties of the case company.

• SQ1 and SQ2 mean to portray the features of AC business, for better serving which, the company launches collaborative program. The findings are traits of the AC business nature in three aspects.

• SQ3 to SQ6 are designed to disclose various elements for which interviewees require collaborative program between distributors and suppliers. The findings include 8 collaborative topics, and for each of them, interviewees provide factual causes relevant to S&OP efficiency.

• SQ7 and SQ8 examine the outcome of collaborative programs, so that researcher could derive the key elements that influence S&OP efficiency in Hisense GmbH.

The following sub-chapters elaborate findings systematically in three main parts: i. The trait of AC Business Nature. ii. Key elements in collaborative program, and iii. Collaborative program impact on S&OP efficiency

4.1 Traits of AC business nature

4.1.1 What are the main differences of customer behaviour and partnership between retail channel and professional AC channel?

Researcher gives key options of business management tasks for interviews to choose the most influential factors in AC and general consumer goods (table 4-1). The results are shown complete difference from the two sectors. Hisense group, representing the later sector, pointed out that the partners focus very much on product design, brand origin and customer experiences. While the 15 AC distributors vote mostly for “Lead- time”, “product R&D”, and “services & technical support from supplier” as the top issues which decide the success of AC business. What’s more, companies with long experiences in professional AC distribution also give additional factors such as “long term distribution agreement (>5 years)”,”return policy”, “project based sales management”, and the hottest issue is “Professional AC sales channel management”.

Managing director Mr.Robert Schweig from Coolmark addressed that these mentioned factors are important for companies to maintain S&OP efficiency.

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Table 4-1 Interview results

Business Operation: SUM

What is/are the factor(s) that could influence your AC sales and operation results? 1 = not relevant, 2 = little influence, 3 = necessary, 4 = rather

important, 5 = critical.

Product design & technology 44 Product quality & price terms 58 Brand name & origin of production 50

Marketing activities 40

Supplier involvement in R&D 63

Lead-time & European inventory 72 Services &technical support from supplier 58

Others, __________

Long term distribution agreement (>5 years) 8

Return Policy 14

Professional AC sales channel management 25 Project based sales management 13

Long payment terms(>90 days) 8

What are the top factor(s) that could influence TV sales and operation results? A.little influence, b. necessary c. fairly important, d. very important

a=1.b=3. c=5.d=7.e=9

Product design & technology 20

Product quality & price terms 8

Brand name & origin of production 13

Marketing activities 2

Supplier involvement in R&D 0

Lead-time & European inventory 8 Services &technical support from supplier 3

Others, __________ 0

End Customer Experience 10

4.1.2 What are the key factors could facilitate the AC S&OP efficiency?

The research found that distributors give their answers mainly from three aspects: Special B2B channel management, Special AC product management, and Special AC services management. These features are unique in AC business nature and influence S&OP to great extent.

B2B distribution in Professional AC Channel

First of all, interviewees address the feature of B2B distribution in Professional AC Channel, which shape the S&OP process greatly. B2B customers focus on reliable quality, and practical price terms; while AC project sales involves complex decision making process, which requires effective information management process.

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Among all the interviewees, the most frequently mentioned topic being addressed is the professional ac sales channel, that majority sales are completed on B2B pattern. There are only less than 5% of AC sales of private contract. In Germany, more specifically, sales are done with business customers, and a major part is sold to installers. The end users are not the buyers, but the owner of residence, office building, or public constructions (see figure 4-1).

As a matter of fact, in B2B business, the partners pay more attention on the factors that could enhance the effectiveness of S&OP in rather than the pure product. Per SQ1, the answers concentrates at a. Lead-time

& European inventory (15 out of 15 companies), b. Supplier involvement in R&D (14 / 15 companies), and followed by c. Product quality & price terms (12 /15 companies), and d. Services &technical support from supplier (10 / 15 companies). Different from normal consumer electronics, Product design & technology comes at the last position (2 / 15 companies), and Marketing activities comes the last but one (5 / 15 companies). The results are self-evident that B2B customers design in the professional AC field are more in favor of lead-time reduction, reliable quality, and practical prices, rather than innovative product.

Figure 4-1, Commercial cooling market: distribution & application

Professional AC channel is another key feature of the business, which drives business partners to collaborate for effective sales process. In comparison with consumer electronics, such as TVs, mobiles, refrigerators, etc, AC products are not sold in department stores or mega retail chains (such as Saturn, Media-Markt).

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The professional AC distributors purchase from producers in and out of the territory, and distribute to regional AC installers /technicians, who complete the installation to the owners or real estate developers (figure 4-2). This is a particular value chain that two important entities are not involved in the value chain, i.e.

finally ender user and project designer. However, they are playing significant decisive role in the loop shape sales progress, seen in chapter 2 AC value chain.

Figure 4-2 AC distribution channel

As stated, up to 95% of the AC products are sold via professional channel, or called “engineering channel”

because each shipment of sales must go through the consultant engineer office for technical approval.

Seen from flow chart (figure 4-3), for both new building and renewing project, the owner firstly consult to building planner, or installers if the job is relevantly small (e.g. one apartment 2 rooms), and after, the consultant engineer prescribe solution with certain AC specification, in meantime, product managers from relevant brand companies might participate in (re)design the AC solution. At the end, decision is made mutually, while brand distributor supply the equipment to installer, and installer commit the installation on site.

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Figure 4-3 Engineering channel sales process Characteristics of AC product management

Secondly, interviewees elaborate the characteristics of AC product management. AC product origin, complexity, diversity require suitable S&OP process.

(1) AC product origins impact on logistics index, as well as marketing activities. There are two main categories of AC solutions, DX system (refrigerant solutions) and Chiller system (water solution).

The former is 100% imported from external countries, while the latter is produced inside Europe.

Players on the market have been set into mainly two different groups. For DX solution, the Japanese producers got leading position due to their high-tech competence in electronic control technology. This group has scaled logistic center in EU. The top brands are DAIKIN, Mitsubishi Electrics, Hitachi, Panasonic, Toshiba, Fujitsu, and Mitsubishi Heavy Industry. There came later the Korean and Chinese brands such as LG, Samsung and Midea, Gree.

The chiller system is originally developed by European producers from France and Italy. Different the former, almost all chiller systems are produced inside Europe against order, without reply on VMI. Supporters hold the favorable arguments for their “Made in EU” tittle and technical features, such as, limited Freon running in the system, no safety concerns for the end users and the environments, etc. The top brands are Italian and French ones, e.g. Climaveneta, Ciet, Atlantic, etc.

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(2) AC product life cycle influences the VMI efficiency down the line. With the new trend, manufacturers must be competent in R&D to fulfil the demands, at meantime pursue for retaining key components in the supply chain.

AC product life cycle had been 15 years, yet it’s getting shorter and shorter till 6 to 12 months currently, basically because of the fast development of construction industry, for which, interior design of a new building is getting more sophisticated. E.g. AC dimension has to comply with the artistic angle and ceiling height of a modern hotel; AC system must be able to communicate with alarm and security system (BMS building management system) in the office building etc. Besides, AC products are required to extend functions beyond heating and cooling. E.g. Multi-functional AC is getting popular, which integrates all air-water treatments into one machine. AC products consist of high technical attributes plus user appealing features of outlook design &end user functions.

Even though the interior technology is significant as for the AC system, the outdoor design and end user functions of the indoor unit are still very important for the business operation. For instance the latest touch screen and controller of AC system is mostly favoured among households; while the Android Apps for on-line on/off setting of AC system becomes the basic function.

(3) AC products markets varies significantly from country to country, region to country due to the variables of climate, consumer behaviour, economics. Therefore, no AC producer could survive from making “Standard AC solution” for global markets, but to play as co-workers with local distributors.

This is the most important lesson that everyone involved in AC business should learn. “AC to certain extents can be compared with food, that each and every different type of consumer might have various tastes and habits” For instance, in southern Europe has long summer where AC products are cooling oriented and suitable for DIY installation by equipped Quick connector clippers. On contrary, central and Nordic regions requires AC for strong heating, which requires efficient defrosting program for outdoor units; More particularly, French use AC not only for heating the room but also the sanitary water, due to the low electricity price. Other variables such as power supply, e.g. southern Europe rarely use 3 phase electricity while in Germany equipment exceed 3kw must apply 3 phase power. All these varieties bring back to producers and distributors with challenges of product development and central logistics management.

(4) Distributors count on the cooperation from producers to fulfil AC products advancement requests

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driven by energy efficiency.

Due to the principle of AC solutions, the product development is mainly about the improvement of the system effectiveness. In EU and each country, there is HVAC (heating ventilation and Air- conditioning) association, who work along with Environment authorities on yearly basis updating the minimum level of EER (Energy Efficiency Ratio) and SCOP (Seasonal Coefficient of Performance), seen as figure 4-2. For instance, according to the new ErP Directive 2009/125/EC regulation, all AC products trading in EU countries (below 12kw) must comply with minimal SCOP 3.8 from January 2014, and 4.0 from January 2015. As results, all AC makers and distributors have to be prepared to phase out old products while introducing better performing product portfolio.

Special AC services standards

Thirdly, interviewees explained the Special AC services standards. AC sales is project based, which give rise to unpredictable lead-time, long payment terms, and technical customization with R&D; AC is high technical products that needs full support during sales 。 The special services standards make AC distributors different from consumer goods retailers. Professional channel urges suppliers participating entire project sales process. It also give rise to unsteady purchase cycle, longer payment terms, cost of high buffer stock, as comprehensive pre-and-after sales services.

(1) AC Sales are project based

Due to the sophisticated ac distribution flow chart, distributors work for project-based sales. This business nature leads to two important characteristics of AC distribution process: a. Various Lead time as per projects attributes and b. Long payment terms vs. long inventory age (goods in stock age).

Regarding to the long payment terms & goods in stock age, it is easily understandable for the latter point that distributors are obliged to keep in stock of all specified articles for on-going projects till the final delivery decision. Therefore, the average inventory turnover is 4 times per year; while the majority of AC units have to stay in stock at least 60 days before shipment. What’s more to be considered, AC articles are named by capacity rather than features. E.g. Hisense AC product line includes 190 models ranging from 0.6kw up to 58kw, while top brand Daikin AC catalogue contains more than 30 series of 600 models of products. As a results, once until the final order confirmed by the owner, distributors has too keep full range of model in case for substitution, i.e. the pre-designed office room has been changed to a meeting room, which requires 2w more cooling capacity per square meter than nominal load. The distributor has to be able to supply referred alternatives at the

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