What is the Right Supply Chain for
you?
◼ The first step in devising an effective supply
chain strategy is to consider the nature of the
demand for the products one’s company
supplies.
◼ Many aspects are important—for example:
— product life cycle,
— demand predictability,
— product variety, and
— market standards for lead times and service (the
percentage of demand filled from in-stock goods).
What is the Right Supply Chain for
you?
◼ If one classifies products on the basis of their
demand patterns, they fall into one of two
categories:
1. they are either primarily functional or
2. primarily innovative.
◼ Each category requires a distinctly different kind
of supply chain.
The root cause of the problems plaguing many
supply chains is a mismatch between the type of
product and the type of supply chain.
What Do These Terms Mean To
You?
PRODUCT FUNCTIONAL/INNOVATIVE
Toothpaste Functional
Lawn Mower Functional
New Movie Innovative
MP3 Player Innovative
Italian designer clothing Innovative
Printer/copier paper Functional
Functional Versus Innovative
Products Differences in Demand
Innovative
Functional
Aspects of Demand (Unpredictable
(Predictive Demand)
Demand)
Product life cycle More than 2 years 3 months to 1 year
Contribution margin* 5 % to 20 % 20 % to 60 %
Low (10 to 20
High (often millions of
Product variety variants per
variants per category)
category)
Average margin of error in the
forecast at the time 10 % 40 % to 100 %
production is committed
Average stockout rate 1 % to 2 % 10 % to 40 %
Average forced end-of-season
markdowns as percentage of 0% 10 % to 25 %
full price
Lead time required for made-
6 months to 1 year 1 day to 2 weeks
to-order products
* The contribution margin equals price minus variable cost divided by price and is expressed as a percentage.
What is the Right Supply Chain for
you?
Devising the Ideal Supply-Chain Strategy
◼ For companies to be sure that they are taking
the right approach, they first must determine
whether their products are functional or
innovative.
◼ Most managers already have a sense of which
products have predictable and which have
unpredictable demand:
⎯ the unpredictable products are the ones
generating all the supply headaches.
Efficient versus Responsive Supply
Chain
Characteristic Statement True/False
1. Product Life Cycle (PLC): how Product life cycle is gene rally True
long the product is viable in the longe r for functiona l products Innovative products tend to become
marketplace than for innovative products
obsolete more quickly.
2. Contribution Margin: profit False
margins for the Contribution margin is gene rally
lower for innovative products Innovative products have less
specific product competition initially and thus higher
than for functional products
margins.
3. Sales forecast error: difference Sales forecast e rror is gene rally True
between forecasted and actual higher for innovative products Innovative products are harder to
demand than for functional products forecast by definition.
Product markdowns are False
3. Number of markdowns: number
generally common for functional
of times price must be reduced This is driven by higher forecast error
products than for innovative
to sell inventory for innovative products.
products
Observed stoc kout rates are False
3. Stockout rate: how often the generally highe r for functional
product stocks out products than for This is also driven by higher forecast
innovative products error for innovative products.
Efficient vs. Responsive Supply Chain
Attribute Efficient/Responsive Chain
Cost savings Efficient
Flexibility Responsive
Stability Efficient
Rapid introduction of new products Responsive
Fast changeovers/setups Responsive
Efficient vs. Responsive Supply Chain
Supply Chain
Statement True/False
Characteristic
Lead times: Responsive Responsive chains generally True
chains generally have shorter have shorter Responsive chains must have
lead times. lead times. faster lead times by definition.
False
Plant utilization: percentage Plant utilization is generally Responsive chains have lower
of time factory is producing higher in responsive chains. utilization rates so they can be
(vs idle) ready on short notice.
True
Efficient chains have leaner
Inventory turns: number of
Inventory turns are generally inventories because product
times inventory is consumed
higher in efficient chains. flow is steadier.
and re-stocked per year
What is the Right Supply Chain for
you?
◼ Having determined the nature of their products and their
supply chain’s priorities, managers can employ a matrix
to formulate the ideal supply chain strategy.
◼ The four cells of the matrix represent the four possible
combinations of products and priorities.
◼ By using the matrix to plot the nature of the demand for
each of their product families and its supply chain
priorities, managers can discover whether the process
the company uses for supplying products is well
matched to the product type:
⎯ an efficient process for functional products and
⎯ a responsive process for innovative products.
Matching Supply Chains with Products
Product
Functional Innovative
Efficient
Match No Match
Supply
Chain
Responsive
No Match Match
Physically Efficient Versus
Market-Responsive Supply Chains
Physically Efficient Process Market-Responsive Process
Supply predictable Respond quickly to unpredictable
demand in order to minimize stockouts,
Primary purpose Demand efficiently at the lowest possible forced markdowns, and obsolete
cost inventory
Manufacturing
Maintain high average utilization rate Deploy excess buffer capacity
focus
Inventory Generate high turns and minimize Deploy significant buffer stocks of parts
strategy inventory throughout the chain or finished goods
Shorten lead time as long as it doesn’t Invest aggressively in ways to reduce
Lead-time focus
increase cost lead time
Approach to
Select primarily for speed, flexibility,
choosing Select primarily for cost and quality
and quality
suppliers
Use modular design in order to
Product-design
Maximize performance and minimize cost postpone product differentiation for as
strategy
long as possible
