This article is a transcript of Chainpin founder Xu Weili's presentation on "Regional Lean Operations Drive Efficiency Gains" at the FDIC 2018 China FMCG Digital Innovation Conference, edited by New Distribution for our readers.

Good afternoon, everyone. I am Xu Weili, founder of Chainpin. First, I would like to thank New Distribution for giving me this opportunity. I will share with you some insights and experiences from Chainpin's two years in the FMCG B2B industry.

Chainpin was founded in mid-2016. Initially, we positioned ourselves as a typical B2B platform, starting with the food category, more precisely, snack foods. Of our 2,000+ SKUs, 80% are food items. Our goal was to provide community supermarkets and convenience stores with a one-stop distribution platform for FMCG food products.

Over the past two days, many industry veterans have shared macro-level insights on the future of FMCG B2B. Today, I will briefly discuss how Chainpin has used lean operations and lean management over the past two years to gradually improve our operational efficiency, thereby gaining a competitive advantage in regional markets.

Lean management is a combination of lean production and Six Sigma. Lean production is a quality management philosophy from Toyota's total quality management system, with the core value of reducing waste in any process. Six Sigma is more about standards—aiming for only three or four errors per million opportunities. It is also a mindset of continuously optimizing processes to move closer to Six Sigma standards.

How do we apply this to improve efficiency in Chainpin's business? In supply chain and market operations, the core value of the supply chain lies in efficiency. Therefore, we have divided our operations into three KPIs to monitor and drive operational efficiency: inventory turnover, picking errors, and picking personnel. A higher turnover rate in a single warehouse means the same inventory generates more value. In 2016, our inventory turnover was 2.5 times; our goal was to achieve 4 times within six months.

The first action was to accurately forecast sales. Only with precise sales forecasting can we work backward to optimize the supply chain to meet sales demand. We analyzed historical purchasing behavior, input it into operational formulas, and accurately predicted sales for the coming days. After half a day of model development and data mining, we increased turnover from 2.5 times to 5 times per month. The fastest-moving items turned over daily, and even the slowest achieved a 10-day turnover. Through this approach, efficiency improved significantly.

Our costs—when entering the FMCG industry, we compete mainly with small wholesalers and distributors whose operational costs are very low. As a formal internet company, our overall operating costs are higher, so efficiency gains are essential to reduce costs. Our picking error rate was 1%. Through lean thinking, we aimed to eliminate non-value-added steps in the single-warehouse picking process to reduce errors to 0.1%. The first step was to remove the inspection step; second, we continuously optimized the picking structure, inventory layout, and picking routes through extensive optimization.

Through these steps, we increased from 60 orders per day to an average of 120 orders per day. By reducing picking steps and eliminating the inspection step, our operating costs are now on par with or even lower than traditional wholesalers. This allows us to achieve higher labor efficiency and lower costs while providing better front-end service and products.

The entire supply chain has three foundational elements: manufacturers, retailers, and consumers. All other processes do not generate value. Last year, we restructured the traditional model, transitioning from a typical B2B model to an S2B2C model.

In the traditional supply chain, B and C are disconnected due to data scarcity, and S and B are also disconnected. If there is a solution that can support and empower B to better serve C with products and services, we only need to handle the overall supply chain integration at the backend, providing B with operational and technical services. Through this model, we can effectively connect brand owners, retailers, and consumers.

In this chain, we offer brand owners the possibility of directly and quickly reaching users. Goods flow from the previous distribution system directly through our system from their central warehouse to our warehouse and then to the end user. B does not need to worry about backend supply chain issues or digital technology problems. C can quickly access products at better prices. Over the past three months, this model has covered more than 500 small Bs. These small Bs can be any retail format; as long as they have their own customer base, we can provide supply chain empowerment.

Currently, our product structure has been adjusted to 60% fresh produce, 20% household goods, and 20% snack foods, allowing small Bs near consumers to access better products. 50% of our products come directly from manufacturers, and the remaining 50% from distributors. We currently have two warehouses—Dalian and Shijiazhuang—and in the future, we will deepen our presence in the Liaoning market.

Why are convenience stores currently in such a dire state? Will new business models emerge to meet the technological and consumer demands that convenience stores currently fail to address? If so, could retailers become the largest supply chain companies in the future?

Because the current value of overall supply chain integration lies more in the physical movement of goods, it has not effectively connected to the C end. How to effectively connect to the C end is a direction we need to explore and think about deeply in the coming period. That is all for my sharing today. Thank you.

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