INVENTORY MANAGEMENT   |   8 minute read

Here’s the secret behind Xiaomi’s disruptive success - are you ready?

Written by Kenneth Chew, Head of Communications at TradeGecko, this post was first published on Business Insider in August 2014. This is a syndication of that original article with some tweaks. Enjoy.

A high-resolution 5 inch LCD display manufactured by Sharp, 13MP and 8MP cameras made by Sony, and a top-of-the-line eight-core Snapdragon processor by Qualcomm – you'd be forgiven if you thought these were specifications for Apple’s latest iPhone, or the newest Galaxy smartphone from Samsung.

But they’re not.

I’ve just described upstart Xiaomi’s latest flagship the Mi4, its newest disruptive entry into a massively competitively global smartphone market – yet another top-end offering from the Chinese manufacturer going for just a fraction of what the latest iPhone or Galaxy will cost you.

There are hundreds of articles charting Xiaomi’s meteoric rise, particularly from a marketing perspective and its wildly successful usage of ‘hunger marketing’.

But unknown to most, perhaps the most fascinating element crucial to Xiaomi’s amazing success is not its marketing (or lack thereof), but rather its wickedly smart, just-in-time approach towards supply chain management, a radical departure from the traditional inventory management techniques typically utilized by other major manufacturers in the smartphone space.

the secret behind Xiaomi's disruptive success

'Those who cannot remember the past are condemned to repeat it'

Philosopher George Santayana’s famous quote was originally made in a socio-political context over a century ago, but learning from the painful past mistakes has always been a key tenet of Xiaomi's founders – which has helped it so greatly disrupt the global smart phone market in just a few short years.

To get real insight into Xiaomi’s unique ethos, one has to delve deep into founder, Chairman and CEO Lei Jun’s past. A computer science graduate from the prestigious Wuhan University, Lei would join Kingsoft, a young Beijing-based software company – swiftly rising to CEO as the company struggled to stay afloat (no surprise when your main competitor’s the global juggernaut Microsoft).

Lei would eventually steer Kingsoft to profitability, exiting the company in 2007 due to ‘health issues’ after taking the company public on the Hong Kong Stock Exchange for a market capitalization of USD400 million. This however, was largely based off its diversified interests like online gaming, as opposed to its software suites.

While USD400 million was certainly no small sum to scoff at, it paled in comparison to the massive internet empires (and corresponding personal profiles and reputations) built by fellow Chinese tech superstars at the likes of Alibaba, Tencent and Baidu. This was taken akin to a personal failure for Lei, and it would be the catalyst driving him to pursue the success he felt his talent deserved.

Moving on from Kingsoft, Lei’s subsequent investment in Vancl, an online retailer which nearly folded, would teach him another vitally important lesson. Poor inventory planning had led to severe overstocking of its warehouses with goods that wouldn’t sell, a mistake Lei would never make again.

Planting the seeds of the smartphone revolution

It was around this time in the late 2000s, when Lei would find himself increasingly fascinated with the burgeoning smartphone craze. One thing led to another, and alongside Lin Bin (a Google mobile executive at that time) and several other accomplished, like-minded veteran technopreneuers, Xiaomi was born.

Taking pointers from his own experiences, and where the likes of industry players like Nokia failed, Lei’s compelling vision of a smartphone company which moved, reacted and adapted to market demands and conditions as fast as a tech startup found great favor amongst investors, and ultimately as we would find out – the public.

With a high-powered team assembled and substantial funding in the bag, securing buy-in from component manufacturers was a crucial stumbling block the unknown Xiaomi had to overcome. While initially rejected by 85 of 100 of the world’s top suppliers, through sheer persistence and some unique strategies, this would be a challenge they would eventually ace.

A phone worth $300, selling for $300

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XIaomi’s unique, wildly successful business model is one for the history books – they’ve drastically cut down on the traditional costs associated with marketing and distributing, by relying purely on the internet for sales. However, many still wonder how it manages to put together such high-quality products at such low price points, which it claims to be just above cost.

What Xiaomi has done, is to essentially eliminate the large 20 percent to 25 percent cut retailers/distributors typically get, and pair that with the vision of earning profits from accessories and web applications/services within its eco-system (MIUI) instead. That’s not to say Xiaomi does not earn from its mobile phones at all, for it still certainly does (albeit at a much lower margin).

But it’s this conscious decision to forgo greater margins from the phones itself, despite sporting components coming mostly from the same exact original equipment manufacturers (OEM) Apple or Samsung would use, that has allowed it to carve out such a substantial market share in no time at all.

What has resulted is a succession of mobile phones that consumers love, which are absolutely nothing like the cheap knock-offs that many traditionally associate China manufacturers with. Xiaomi phones are top-of-class, full-featured products often containing components from some of the top tech firms in the world such as Sony, Sharp and LG – put together by the same assembly factories used throughout the industry such as Foxconn.

Recently-released statistics for Q2 2014 have just reported that Xiaomi is now the top smartphone vendor in China, overtaking the venerable Samsung – and with their ambitious expansion plans, the rest of the world had better watch out.

Just-in-time, with just-the-right-amount

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From a consumer perspective, the limited availability of Xiaomi's products in batches has strongly driven consumer fervor and inculcated built-up demand – regardless of whether this supply scarcity is legitimate, or one artificially implemented, precisely in a bid to build up and drive that demand (a topic which has been widely debated online umpteen times).

From a supply chain management perspective however, Xiaomi’s ‘Just-in-time’ inventory holding technique has been a staple of its business model that’s helped keep costs down by lowering inventory holding costs, and decreasing risks of overstocking on products which don’t move (like Lei’s Vancl).

By only purchasing components and manufacturing products after users have placed their orders, Xiaomi also eliminates having to manage surplus raw materials, and drastically reduced holding/shipping costs (with as much as up to 80% less inventory in the warehouse) by delivering finished phones almost as soon as they have rolled off the production line.

In addition to the limited production runs, Xiaomi has also brilliantly departed from traditional mobile sales strategies to augment its razor-thin product profit margins, by selling the same phones for a much longer period than the majority of its competitors.

For example, it might stick with a flagship product for 18 months instead of one every half a year, giving it more flexibility with profits, better scope to sell accessories, and most importantly to take advantage of economies of scale, when component and production costs drop over time.

Xiaomi’s model was oft-mocked in the company’s infancy, with naysayers arguing along the ‘if it isn’t broke, don’t fix it’ line. But even giants like Nokia and Motorola fell by the wayside, trying to compete traditionally with today’s leaders like Apple and Samsung.

Lei and team’s vision has clearly paid off – they spotted an opportunity to not just impact, but greatly disrupt the worldwide smartphone market through the ground-up rethink and implementation of a business model never before tried in this industry.

One thing’s for certain now, nobody is doubting Xiaomi anymore.

A Mi in every business

No two businesses are ever perfectly alike, and a bevy of stars certainly aligned for Xiaomi to achieve the success it has today. But there would certainly be lessons applicable from Xiaomi’s story for just about any company.

These would include their famed ‘hunger marketing’ tactics (already a well-known case study in itself), as well as that unwavering belief in a compelling vision which radically departed from the norm - not an easy task at all when everyone else was trying to knock them down.

Inventory however, will always remain the biggest asset and lifeblood of any retail business, and putting in place effective inventory holding and stock management techniques will give you a good jump-start on the path to success.

The most important lesson to take home would thus perhaps be the one Lei learnt from Vancl, and which he absolutely nailed the second time around with Xiaomi – the importance of finding, understanding and implementing the right inventory holding technique to suit the needs of your business.

Lei understood that inventory management can literally make or break a business, and structured Xiaomi’s entire business operations around the ‘Just-in-time’ inventory holding technique to minimize logistics and holding costs, while giving the company the best opportunities to reap enormous long-term success and profits.

The answer for your business might not be ‘Just-in-time’, but perhaps an alternative technique such as drop shipping (sellers on eBay, Amazon etc), consignment, or even cross-docking (Walmart). But whatever the right answer is, Xiaomi’s remarkable success story has highlighted how crucial a decision that is, and the massive impact it has on your business as a whole.

And that’s something we can all definitely learn from – for the little Chinese startup that could is now a rapidly-growing powerhouse conquering one market at a time, well on the path to global domination.

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Image credits: 1 | 2 | 3 | 4

See also:

3 lessons startups can learn from Alibaba

Tesla created a custom-built supply chain that competes with the best, and so can you

Out of stock problems? Walmart, Nike, and Best Buy had them too, but here's how you can do better

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