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• Much technology and brainpower is applied to improving supply chain performance
• Point-of-sale scanners can capture the customer's voice
• Electronic data interchange lets all stages of the supply chain hear that voice and react by using flexible manufacturing, automated warehousing, and rapid logistics
• Quick response, efficient consumer response, accurate response, mass customization, lean manufacturing, and agile manufacturing are new concepts that offer models for applying the new technology to improve performance
• Supply chain performance has worsened, costs have risen to unprecedented levels because of adversarial relations between supply chain partners, as well as dysfunctional industry practices such as overreliance on price promotions
• Poor coordination among supply chain partners in the U.S. food industry wastes $30 billion annually
• Many supply chains suffer from an excess of some products and a shortage of others due to an inability to predict demand
• A department store chain found that 25% of its customers had left its stores empty-handed because the items they wanted were out of stock

Demand Consideration

• Managers lack a framework for deciding which ideas and technologies are best for their company's situation
• An effective supply chain strategy requires considering the nature of the demand for the products a company supplies
• Important aspects to consider include product life cycle, demand predictability, product variety, and market standards for lead times and service
• Products can be classified on the basis of their demand patterns as either primarily functional or 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

Functional vs Innovative

• Functional products include staples, satisfy basic needs, don't change much over time, have stable and predictable demand, and long life cycles
• The stability of functional products invites competition which often leads to low profit margins
• Companies may introduce innovations in fashion or technology to avoid low margins
• Innovative products have unpredictable demand and a short life cycle of just a few months
• Companies must introduce a steady stream of newer innovations as imitators erode the competitive advantage that innovative products enjoy
• The short life cycles and the great variety typical of these products further increase unpredictability

Functional vs Innovative Comparison Table

• Aspects of Demand of Functional Products:
  • Product life cycle: more than 2 years
  • Contribution margin: 5% to 20%
  • Product variety: low (10 to 20 variants per category)
  • Average margin of error in the forecast at the time production is committed: 10%
  • Average stockout rate: 1% to 2%
  • Average forced end-of-season markdown as percentage of full price: 0%
  • Lead time required for made-to-order products: 6 months to 1 year
• Aspects of Demand of Innovative Products:
  • Product life cycle: 3 months to 1 year
  • Contribution margin: 20% to 60%
  • Product variety: high (often millions of variants per category)
  • Average margin of error in the forecast at the time production is committed: 40% to 100%
  • Average stockout rate: 10% to 40%
  • Average forced end-of-season markdown as percentage of full price: 10% to 25%
  • Lead time required for made-to-order products: 1 day to 2 weeks

Supply Chain Functions

• A supply chain performs two distinct types of functions: a physical function and a market mediation function
  • A supply chain's physical function includes converting raw materials into parts, components, and eventually finished goods, and transporting all of them
  • Market mediation ensures that the variety of products reaching the marketplace matches what consumers want to buy
• Physical costs are the costs of production, transportation, and inventory storage
• Market mediation costs arise when supply exceeds demand and a product has to be marked down and sold at a loss, or when supply falls short of demand, resulting in lost sales opportunities and dissatisfied customers

Functional Products

• The predictable demand of functional products make market mediation easy because a nearly perfect match between supply and demand can be achieved
• Companies that make functional products focus almost exclusively on minimizing physical costs
• Companies create a schedule for assembling finished goods for at least the next month and commit themselves to abide by it
• Freezing ensures companies can employ manufacturing-resource-planning software, which orchestrates the ordering, production, and delivery of supplies, thereby enabling the entire supply chain to minimize inventory and maximize production efficiency
• Crucial flow of information is the one that occurs within the chain as suppliers, manufacturers, and retailers coordinate their activities to meet predictable demand at the lowest cost

Innovative Products

• The uncertain market reaction to innovation increases the risk of shortages or excess supplies
• High profit margins and the importance of early sales in establishing market share for new products increase the cost of shortages
• The most important thing is to read early sales numbers or other market signals and to react quickly

Physically Efficient Versus Market-Responsive Supply Chains

• Physically Efficient Process involves:

• supply predictable demand efficiently at the lowest possible cost

• maintain high average utilization rate

• generate high turns and minimize inventory throughout the chain

• shorten lead time as long as it doesn't increase cost

• select primarily for cost and quality

• maximize performance and minimize cost

• Market-Responsive Process involves:

  • respond quickly to unpredictable demand in order to minimize stockouts, forced markdowns, and obsolete inventory
  • deploy excess buffer capacity
  • deploy significant buffer stocks of parts or finished goods
  • invest aggressively in ways to reduce lead time
  • select primarily for speed, flexibility, and quality
  • use modular design in order to postpone product differentiation for as long as possible

• The distinctions between functional and innovative products and between physical efficiency and responsiveness to the market seem obvious

• Products that are physically the same can be either functional or innovative. -For example, personal computers, cars, apparel, ice cream, coffee, cookies, and children's car seats all can be offered as a basic functional product or in an innovative form

• Companies turn traditionally functional products into innovative products while continuing to focus on physical efficiency in the processes for supplying those products thus resulting in many broken supply chains

Supply Chain Matching

• Companies must determine whether their products are functional or innovative Most managers have a sense of which products have predictable and unpredictable demand

• Companies must decide whether their company's supply chain is physically efficient or responsive to the market

• Using the matrix helps 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

• Companies that are either an innovative product with an efficient supply chain or a functional product with a responsive supply chain tend to be the ones with problems

• Most companies that introduce functional products realize that they need efficient chains to supply them

• Functional products require an efficient process; innovative products, a responsive process

• Companies with innovative products the rewards from investments in improving supply chain responsiveness are usually much greater than the rewards from investments in improving the chain's efficiency

Financial Perspective

• Every dollar a company invests in increasing its supply chain's responsiveness, it usually will reap a decrease of more than a dollar in the cost of stockouts and forced markdowns on excess inventory that result from mismatches between supply and demand
• Consider a typical innovative product with a contribution margin of 40% and an average stockout rate of 25% The lost contribution to profit and overhead resulting from stockouts alone is huge
• Economic gain from reducing stockouts and excess inventory is so great that intelligent investments in supply chain responsiveness will always pay for themselves

Examples

• Compaq decided to continue producing certain high-variety, short-life-cycle circuits in-house because local production gave the company increased flexibility and shorter lead times
• World Company produces its basic styles in low-cost Chinese plants but keeps production of high-fashion styles in Japan
• Auto industry variety of options available to consumers had an impact on productivity at a Big Three auto plant
• Company could offer 20 million versions of the car, but because ordering with desired options entailed an eight-week wait for delivery, more than 90% of customers bought their cars off the lot
• Auto distribution channel is like an hourglass with the dealer at the neck
• The computer industry of 20 years ago shows that a company can supply an innovative product with an unresponsive process if the market allows it a long lead time for delivery
• Most computer companies find themselves firmly positioned in the upper right-hand cell of the matrix

Toothpaste Example

• A company needs to move to the left if it has a product line characterized by frequent introductions of new offerings, great variety, and low profit margins
• A few years ago, a grocery category existed with with 28 varieties of toothpaste from one manufacturer
• The answer is no, toothpaste should be in the product category to from innovative to functional

Campbell Soup Case Study

• launched the continuous-replenishment program with its most progressive retailers
• Campbell establishes electronic data interchange (EDI) links with retailers
• Retailers electronically inform the company of their demand for all Campbell products and of the level of inventories in their distribution centers
• Campbell uses that information to forecast future demand and to determine which products require replenishment based on upper and lower inventory limits previously established with each retailer
• The program cut the inventories of four participating retailers from about four to two weeks of supply

National Bicycle

• A good example of a responsive supply chain achieved through avoiding uncertainty
• In 1986, Matsushita appointed as president of National a new executive who concluded that National's only hope was to focus on that segment and use the division's strengths to develop a responsive chain that could supply sports bikes
• By radically increasing the number of choices from a few types of bikes to 2 million, it can induce the customer to sacrifice immediate availability and wait two weeks for a bicycle

Sport Obermeyer Case Study

• Designs and manufactures fashion skiwear and distributes it
• Launches a project to attack problems by blending the three strategies of reducing, avoiding, and hedging against uncertainty
• Was able to avoid uncertainty on half of its production by committing that production after early orders had been received in February
• This approch has cut the cost of both overproduction and underproduction in half