Supply Chain Innovation Behind Success Story of Hai-O Enterprise Berhad

Abstract

Hai-O Enterprise Berhad was established in the year 1975 with 38 years history by offering a wide range of complementary green products. It offers medicines, medicated tonic, wellness, beauty, healthcare and also clinical services. The success story is just amazing and excellent especially the supply chain innovation in manufacturing and distributor segmentations. Supply chain innovation can improve the cost control, shorter the lead time and enhance the supply chain effectiveness and efficiency. Furthermore, with the increases in the natural herbs awareness and healthy life style concern among customers, Hai-O needs to develop more new products and innovations. These become important to improve the customer’s satisfaction by serving different customers needs and wants. Hai-O Enterprise Berhad is practicing green strategy for supply chain innovation. SWOT analysis had been completed to understand the strengths, weaknesses, opportunities and threats of the whole of company. Besides, several key success factors being identify and discuss such as new product developments, wide range distributors, pharmaceuticalmanufacturingand etc. However, there are some challenges which is facing by company. These include single target market, less popularity towards Chinese medicine among young buyers, operate in the mature product life cycle and small number of employees. Some alternative solutions are suggested in order to overcome these problems. The core business of the Group involves wholesale and retail, multi-level marketing, pharmaceutical manufacturing and Chinese medicinal clinics. For over three decades, Hai-O had successfully gained its market leadership in Malaysia through the professional Chinese medicinal expertise and also the efficient and effective distribution network along the supply chain.

Keywords: Case Study, Traditional Chinese Medicine, Supply Chain Innovation, Multi-Level, Marketing, Pharmaceutical manufacturing, Retailer

INTRODUCTION

Hai-O Enterprise Berhad was established in the year 1975. For almost 38 years with fullyof sustainable historythat immensely interested, Hai-O becomes successes and able to overcome some challenges. The history started from a very humble Chinese man, Mr Tan Kai Hee who is the founder of Hai-OCompany. He began the small grocery stall with a little start-up capital in hand. As the time goes by, the company becomes an established household by offering a wide range of products. It is not just the complementary medicines, medicated tonic, wellness, beauty and healthcare products but also it provides traditional Chinese clinical services.

Hai-O ultimate philosophy and principle are providing superior quality healthcare products at affordable prices, so that everyone can afford to enjoy the healthcare products. Hai-O has two statements which guides the company operations.First,provides the benefits for society and second, offers high quality of products at affordable prices. This is due to taking some advantages from customers are not allowed in Hai-O business practices. Hai-O is working hard with its commitment to treat the customers with high standards and good services.

The core business of the Group involves wholesale and retail, multi-level marketing, pharmaceutical manufacturing and Chinese medicinal clinics. For over three decades, Hai-O successfully becomes the marketplace leader in Malaysiathrough the professional Chinese medicinal expertises. Further, it is also supported throughthe efficiency and effectiveness of distribution networks along the supply chain. For more details, the Company business operation can divide into five segments:

a)Wholesale, which include wholesaling and trading in Chinese herbal medicines and healthcare products, herbs and tea; medicated tonic like bird nest, ginseng, etc.

b)Multi-level marketing, which includes conducting the sales through multi-level direct marketing of health food, healthcare, wellness and beauty products;

c)Retailing, including retail chain stores;

d)Manufacturing, which includes manufacturing, producing and distributing pharmaceutical products and health food

e)Technology, which provides heat transmission and energy saving technology.

Besides, Hai-O operates in leasing of machinery and equipment, licensed money lender, insurance agent, advertising services, rental income and investment holding. The Company's subsidiaries include Grand Brands (M) Sdn. Bhd., Hai-O Credit & Leasing Sdn. Bhd. and Hai-O Energy (M) Sdn. Bhd. The reason behind this is because, the company tries to diversify in various business sectorsto gain more market shares, maximum profits and revenue and based on the scarcity resources available. After accomplished many successful results, Hai-O moves into the new stages. Hai-O was listed on the Second Board of Bursa Malaysia Securities Berhad in 1996 as the first traditional healthcare company on the Bursa stock exchange. It also had successfully transferred to the Main Board of Bursa Malaysia on 8 October 2007. Moreover, Hai-O has emerged as a leading direct selling company in Malaysiaafter the establishment of the new form of business format in September 1992 which is called Hai-O Marketing.

Further, in 2002 Hai-O had successfully established a joint venture with Beijing Tongrentang. This corporation is opened under named of Peking Tongrentang (M) Sdn bhd. This business is part of good innovations which always offers by Hai-O. The high performance in offering Traditional Chinese Medicine (TCM) Consultation services and high quality herbal medicines to the public has achieved through this business. The more interesting is that Hai-O marketing expands its business to Indonesia on 10 April 2010. It is under named PT Hai-O Indonesia which officially launched in Jakarta. Recently, based onHai-O’s Annual Report in2013, the multi-level marketing (MLM) segment, Hai-O Marketing Sdn Bhd ("HOM") was awarded recognition from the World Federation of Direct Selling Association ("WFDSA") in collaboration with the Direct Selling Association of Malaysia ("DSAM") for participating and meeting the criteria of Ethics Recognition Programme Global Code.

With the great performance has been achieved, the local media had selected Hai-O Marketing as one of the top ten direct sales company in Malaysia. There are also several recognitions obtained such as the most impressive company, the fastest growing direct selling company, and the most established company. These outstanding results have the positive impacts. The employees are no exemption of this. It encourages every single employee to work better and harder in the future.Today, Hai-O Marketingservesover 140,000 distributorshipsthrough more than 40 distribution centres throughout Malaysia and Indonesia.

SWOT ANALYSIS

Strengths / Weaknesses
  • Market leader in the Chinese medicine market
/
  • Manufacturing cost high

  • Variety product line
/
  • Lack of information sharing among distributors / store

  • Wide distributors and marketing team

  • Advanced technology

Opportunities / Threats
  • Customer’s needs ,wants & expectation change
/
  • New foreign competitors entry

  • Traditional Chinese medicine market growth
/
  • Technology changes rapidly

  • Economic

  • Customers demographic and sociological changes

Figure 1 SWOT analysis of Hai-O Company

A)Strength

  1. Market leader in the traditional Chinese Medicine market

Hai-O Enterprise Berhad was the market leader in the traditional Chinese medicine in Malaysia. Hai-O founder, Mr Tan Kai Hee has been activelyinvolved for the past 38 years ago and he also has strong knowledge and experience background towards the traditional Chinese medicine. Besides that, Hai-O product price range is more to reasonable price so that everyone can afford to buy. The cheaper price comes with high quality of products that enables Hai-O to gain the bigger market share among the competitors.

  1. Variety of product line

Hai-O has the variety of product lines such as personal cares, healthcares, supplements, beauty products, health tonics, tea, gifts and festival hampers. Therefore, the customers have many choices to purchase the products. This will lead to enhance customers’ loyalty towards Hai-O Company.

  1. Wide distributors and marketing team

Hai-O has a wide distributor’s network and they will continue to expand the business network in order to reach more customers and gain capital market. The retail segment reached out to Bandaraya Melaka, Bukit Mertajam, Penang, Tampin, Negeri Sembilan and so on. At the moment, Hai-O has a branch network of 70 outlets, including 9 franchise shops located throughout Malaysia and 3 outlets are located in East Malaysia. The total number of outlets as below:

Region / Hai-O Outlets / MLM Stockiest/ Sales Point
Central Peninsular / 32 / 8
Southern / 22 / 9
Northern / 12 / 10
East Coast / 1 / 7
East Malaysia / 3 / 3
Total / 70 / 37

Note:Hai-O Financial Year Ended 2013

  1. Advanced technology

One of the strengths of Hai-O Company is having advanced technology along the Pharmaceutical manufacture processes and operation flows. For example, it has heat transmission and energy saving technology. The energy saving technology is utilized to reduce the operation and manufacturing cost, time saving and minimize the environment pollution when produce the drug products.

B)Weaknesses

  1. High of manufacturing cost

One of the weaknesses of Hai-O Company is that it has high manufacturing cost. The Chinese medicine products such as cordyceps capsules, ginseng, drugs, bird’s nest, bird’s nest concentrate, medicated wine and chicken essences are the expensive products and they are quite complicated in the manufacturing processes. Thus, Hai-O Company needs the professional’s knowledge and experience to manufactures the products.

For example, the chicken essences manufacturing process is highly complicated. In term of raw material, it needs few stages to get the essences of final product. Furthermore, in the case of bird’s nest, Hai-O needs to hire many workers to clean up and separate out the good quality of bird nest with the nest dust. At the same time, full monitoring and controlling are important to implement along the manufacturing processes. These are to ensure the good quality of standards is taken place. Therefore, all of the processes need more labour intensive which will incur high manufacturing cost.

  1. Lack of information sharingamong distributors / store

Another weakness of Hai-O is lack ofinformation sharing among distributors or store. Hai-O Marketing is a direct sale marketing basis and it causes many of the distributorsare working independently instead of team. The information such as company new policy, new promotion or product development is hardly to share among all distributors because the distributors are located in different places over Malaysia. Hai-O supply chain management will be more efficient and effective if the information can share among the distributors.

C)Opportunities

  1. Customer’s needs ,wants & expectation change

Nowadays, the customer’s need and want are changing. The reason might be due to the customers today are higher educated as compared to the last times, they are looking for more information and knowledge about the market and product offers. By looking at the product prices and the quality of products, they will ask for something beyond these two criteria. Besides, customers also have the bigger purchase power to fulfil their needs as compared to the previous time. This will be assumed as the big opportunities for Hai-O Company to promote its traditional Chinese medicine products and supplements to the healthy conscious customers group.The opportunities are enable Hai-O to promote the health care culture and improve the human well being.

  1. Traditional Chinese medicine market growth

Growth in the Chinese medicine market is a new opportunities for Hai-O because when the market is growth meaning that the demand for traditional Chinese medicine and healthcare products also increase than previous. Chinese herbs and supplement product are getting much attention among customers because they believe that traditional Chinese medicine is less preservative, less harm and side effect to their body. Further, it is found that some of the supplement is gentle to use and can be consumed every day in order to maintain the healthy and strong body.

D)Threats

  1. New foreign competitors entry

When the demand for the traditional Chinese medicine was increased, definitely there are some threats for Hai-O Company. For example, the new foreign competitors are entry to the market. This will lead the reduction of Hai-O’s profit. The competitors will come from for both direct and indirect format of health product retailers with price-cutting promotions. In details, dominantly the competitors are coming from the bigger Chinese population such as Taiwan, China, Hong Kong and Korea. For this point of view, the competitors for sure will understand the needs and the expectation of Chinese customers very well. These few countries supply their healthcare products withgood packaging, advertising and promotion. As a consequence, these things become threats that should be facing by Hai-O.

  1. Technology changes rapidly

Technology changes rapidly nowadays, this also an external threats for Hai-O because in order to follow the market new trend, they have to adopt the new technology and Hai-O needs to allocate a large amount of investment on the machine and technology.

  1. Economic

The economic condition in Malaysia is quite weak. This will affect the demand andthe purchase power of customers, especiallyin Chinese medicine products and supplements. These products can be categorized as luxury products when the economy is volatile or not good. Moreover, government issued the new minimum wage policy that effectively implemented from 1 January 2013. This will lead into the inflationary pressure, higher operation costs and continuing downward pressure on Ringgit against US Dollar. All of these things become the major threats when Hai-O Company operates in the slow economic condition.

  1. Customers demographic and sociological changes

Customer’s demographic and sociological are changing. For example, in terms of the percentage of born rate among the Chinese family is dropping. On the average every Chinese family only has one to two kids. It causes the Chinese customer market size will drop and it will reduce the demand and sales of Hai-O Chinese medicine products.

KEY SUCCESS FACTORS

Key success factors are playing a crucial role in order to bring the company business into the higher performances. Maintaining the sustainable operation with the market leader position is the main purpose of key success factors. It is very interested to know about what are the keys success factors which enable Hai-O always growth up from a very small grocery stall into the listed companyon Bursa Malaysia Securities Berhad. It also successfully achieved as a market leader throughout Malaysia local market. The following is the key success factors of Hai-Company.

  1. New product developments

By understanding the customer’s needs and wants are always changing, Hai-O Company realized that they need to change and renew their products. Hai-O started to become more creative and innovative Company by introducing the new traditional medicine product to the customers. One of the good alternatives for Hai-O to response the customers’ wants is by arranging the joint venture with other companies. The positive outcomes are coming out from this. It brings Hai-O to gain more knowledge, idea and technology that will support the development of new products.For example, Peking Tongrentang (M) Sdn Bhd is a joint venture company between Hai-O and Beijing Tongrentang Co Ltd in 2002.

The history of Peking Tongrentang (M) Sdn Bhd started when the first retail opened in sun complex Kuala Lumpur. The company was getting the good respond from customers and because of this, the second retail was opened in Penang. Furthermore, Tongrentang isexpert in manufacturing of finest traditional Chinese pharmaceutical products by using the effective raw materials.

Pharmaceutical manufacturingis the supply chain innovation of Hai-O Companywhere the initial stage of the business just a small grocery stall and more on selling in the daily use product and herbs tea. At the initial stage of the business, a big tea pot filled with Chinese herbs tea and selling in front of the shop corridor is a store landmark for Hai-O retail. There are few examples of famous Tongrentang products including the Angong Niuhuang Wan (Heart-Refreshing Bezoar Pill) and the Wuji Baifeng Wan (Black-Bone Chicken Pill) which stimulate a high demand power among the Malaysian women category. The reason might be due to the Malaysian Chinese women are more likely to consume traditional Chinese medicineforbody health improvement. Next, they believe that this medicine is gentle for their health and less side effect as compared to other healthcare products.

By having the brand name of "Tongrentang" in the Hai-O product list, quality can be assured and customers are more comfortable to consume it. Then, Hai-O expands the product line into the Chinese tea category such as Wu Long tea and Long Zeng Tea. It is because the customers prefer to consume Chinese tea at the leisure time such asin social meeting or family gathering. Another reason is also because the Chinese people have long established tea culture since thousand years ago.