Tuesday, February 25, 2014

Xiaomi, a good practise in fast supply chain management in mobile industry!

Regrading to Technology and Supply Chain, the first product that comes into our mind must be Iphone, and Steve Jobs is the guy who creates all the success of Apple. From this prospective, In China, there is another so-called "Chinese Steve Jobs" who's real name is Jun Lei, the founder of Xiaomi Workstation, which is the most popular Advanced Smart Phone and Mobile Device Manufacturer, as well as Internet Content Provider in China.


From the picture above, we can see that the Logo of Xiaomi is MI, which stands for Mobile Internet, the core value of this company. It can also be interpreted as Mission Impossible, indicates Xiaomi has the ambition to be creative and innovative.

Since not many of readers have heard of this company before, I briefly introduce the business model of this company. Rather than manufacturing the smart phone (many Chinese mobile phone manufacturer already existed in the market), Xiaomi first focuses on creating an active mobile phone community call "MI Talk", in which people can discuss their user experience, how to customize their android system, and what functions they really need in their next mobile phone. Six months after the community is launched, there were over 3 million users active in the community. After gathering enough feedback from users, Xiaomi established a technical team to deeply customize the Android system, and publish its improved mobile operating system as MIUI on line. On the same month it launched, over 300 thousand users downloaded MIUI. 4 months later, Xiaomi officially launch their products: Xiaomi Phone and Xiaomi TV box.


But how can Xiaomi manufactures Xiaomi Phone in such a fast pace? Let's look into its supply chain.

1. Procurement: In order to shorten the procurement process and lower the cost, most of the electronic components are imported from countries nearby such as MOS and battery from Thailand, Screen from Sharp, camera from Sony. Once these components are ready, they will be shipped to Shenzhen, one of the biggest port city near HongKong, and assembled there in local foundry.

2. Manufacturing: Xiaomi's Manufacturing model is similar to Dell's, which is based on users' demand. First potential Xiaomi Phone users will place orders online. Once Xiaomi has gathered enough order, they then will purchase components from its suppliers.

3. Inventory Management: Since Xiaomi only purchases components and manufactures Xiaomi Phones after users have placed orders. There is no surplus raw material to be managed. Once a phone assembly is complete, it will be delivery to several warehouses across china. As every phone has already had an owner, it will be delivered as soon as it arrive the warehouse. In the warehouse there are two team, one team is to receive and double-check phone from foundry, and the other team will pack the phone with accessories, attached the order to the package, and delivery tt to the user. Such a high turnover rate leads to 80% less inventory in the warehouse, while the other 20% is occupied b replacement battery and accessories.

4. Delivery: In order to reduce the cost of shipping, Xiaomi established its warehouse near warehouses of other big E-commerce companies, and established cooperation on warehouse management and shipping, Therefore, Xiaomi can take advantages of E-commerce's delivery system, to lower their cost and ensure the product can reach its user faster.

5. Sales Strategy: Xiaomi makes use of Hunger Marketing, by lower the yield of production on purpose, to create a situation that there is relatively high demand over the supply. Every time XIaomi only launched a limit smaller number (near 100-300 thousand) Xiaomi phones, and once its online order platform is launched, thousands of people will fight for a phone, and all orders are fulfilled within 30 minutes. Usually companies will use Hunger Marketing to maintain a relatively higher price for its product, but Xiaomi is trying to maintain or even lower its low price. Xiaomi assumes that once the productive is beyond their expectation with such a low price, more people will be attracted and get one Xiaomi product. Since China is a big market, profits will increase eventually. Therefore, Hunger Marketing is a good way for Xiaomi to advertise its brand name.

Xiaomi batches sell out in minutes

However, even Xiaomi so far has created a successfully supply chain model, I think there still are some risks in its current supply chain management according to what we have learnt from the class.

1. Since the suppliers of Xiaomi are from nearby countries, and each kind of components is usually from a single company. It will be a great threat for the supply chain once the suppliers could not fulfill the order in time. For example, the floods in Thailand in 2011 have created a huge negative impact on Xiaomi's business.
Besides, it is also risky when these suppliers are forced not to offer any components to Xiaomi by its competitors. Once unfortunate situation happen, if there is no alternative option, Xiaomi's business model will eventually break down.

2. As Xiaomi outsources its phone manufacturing and assembly process to foundry, it should pay attention in the quality of its products. As far as I know there are some quality problems in Xiaomi Phone, which seriously impact Xiaomi's brand image in the market. From sustainable supply chain aspect, Xiaomi should make regulation and code of conduct to regulate foundry's conduct, including highly standardized manufacturing process, no child labor, friendly working environment and so on. Therefore, strict monitoring of production is necessary for further business.

3. Excessive use of Hunger Marketing will hurt customers’ loyalty to the company. Because of Xiaomi Hunger Marketing strategy, it leads to a relatively low Chinese smart phone market share. Since Xiaomi has established a good reputation in user experience, Xiaomi should take advantages of it, enhance its productivity, improve its product quality, and enjoy the benefit of economics of scale. At that time, Hunger Marketing is useful in increasing the net profit of sales, and establishing high-quality Brand Image.


As far as I know, most new brand like Xiaomi and Tesla are trying to establish a fast and agile supply chain in their business model. So here I would like to ask whether there are new, novel, and fast supply chain model has developed by new companies? Thanks for your sharing.

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