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by Marshall L. Fisher
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Much technology and brain power has been applied to improve supply chains.
Companies are able to capture customers voice by using sophisticated marketing
tools. Their goal is the accurate and quick response to market demands. Mass
customization automated warehousing and agile manu!acturing are the means leading
to that goal.
"espite these e!!orts many supply chains have never been worse. #dversarial
relationships among partners as well as lack o! coordination have lead in many cases
to an unpredictable rise o! cost. The e$cess o! one product and the shortage o!
another is a common symptom. %hy companies are unable to improve their supply
chain per!ormance& 'ow can you avoid these problems&
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The most crucial issue is the comprehension o! the connection between the nature o!
demand and the type o! supply chain you need. The !undamental problem is the
mismatch between the type o! product and the type o! supply chain.
There!ore you have to speci!y !irst the type o! your product. ($perience has shown
that there are two categories o! products) !unctional and innovative. There are some
criteria such as li!e cycle and t unpredictability o! demand to make up your mind
whether your product belongs to the !irst or the second category.
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Functional products are those which satis!y basic needs such as !ood and gas. These
products have long li!e cycles and predicable *usually stable+ demand. "ue to their
stability !unctional products attract many competitors who desire a share o! the
pro!its. Companies in order to avoid a decrease o! their pro!its introduce innovative
characteristics into their products. For e$ample ,-.-'M# a /apanese tire
manu!acturer will soon o!!er color!ul motorcycle tires0 "ue to innovation companies
achieve higher pro!it margins and there!ore they are !orced to introduce a steady
stream o! newer innovations. The variety o! products constantly increases as well as
the unpredictability o! demand but li!e cycles are becoming shorter. 1n a !ew words
your !unctional product becomes more and more innovative.
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2ince 1 have de!ined !unctional products it is easy to do the same !or the innovative.
These products have short li!e cycles and it is very di!!icult to !orecast their demand.
1nnovative products usually depend on current !ashion and li!e3style and they
generate all the supply headaches because o! the uncertain market reaction that
increases the risk o! having shortages or e$cess supplies.
#lthough the distinctions between !unctional and innovative products are obvious the
!act that some products which are physically the same can be either !unctional or
innovative is the reason why many companies !ind it di!!icult to understand the e$act
nature o! their product. There!ore to optimize the per!ormance o! your supply chain
the !irst thing you have to do is to think care!ully and decide in which category your
product belongs.
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There are two types o! supply chains) e!!icient and responsive. #s you can probably
guess e!!icient chains are applied to !unctional products and responsive to innovative.
Let us see why.
# supply chain per!orms two di!!erent !unctions) a physical !unction and a market
mediation !unction. (ach o! the two !unctions incurs costs. 5hysical costs are these o!
production transportation and inventory storage. Market mediation costs arise when
supplies do not match with the demand.
The predictable demand o! !unctional products makes physical costs much more
crucial than market mediation costs. #pplying care!ully !orecast methods you can
achieve service level grater than 678. #s a consequence market mediation costs are
hold back. 2o your primary concern is the physical !unction costs. To that end the
stable production rate allows the companies to employ M95 so!tware which organizes
and supervises the ordering production and delivery o! supplies. #s a result
inventory is minimized and production e!!iciency is ma$imized. The important !low
o! in!ormation is within the chain in order to satis!y the demand at the lowest cost.
2uppliers are chosen !or their low cost and not !or their !le$ibility
-n the contrary this approach is completely wrong !or innovative products. -n this
occasion market mediation costs are the most important. This does not mean that there
are not any physical costs but compared to market mediation costs are less
signi!icant. 1t is very important !or an innovative product to establish market share at
the beginning o! its li!e a !act that leads to the increase o! the cost o! shortages. #lso
the short li!e cycle increases the risk o! obsolesce due to e$cess supplies. Thats why
market mediation costs are so crucial in that case. The important !low o! in!ormation
is not only within the chain but it also is !rom the market to the chain. 1t is also
desirable !or the coordination o! the chain all the partners receive real time
in!ormation !rom the market. Finally suppliers are not chosen !or their low cost but
!or their agile production and their short lead times which allow them to respond
quickly to the markets unpredictable demand.
Companies that manu!acture !unctional products usually realize that they need an
e!!icient supply chain. 1! their products remain !unctional over time companies stick
to e!!icient supply chains. -n the other hand it is very easy !or a company to
trans!orm its !unctional product into innovative through the introduction o! any
innovation without realizing that change. #ll o! a sudden service level drops and
inventories o! unsold products go up. "espite the e!!orts to decrease inventories and
to restore service level the number o! the problems increases e$ponentially over
Twenty years ago companies could supply an innovative product with an e!!icient
chain because market was allowing long lead times !or delivery. For e$ample lead
times in computer industry were up to two years0 :owadays the acceptable lead time
has dropped to a !ew days. 1nevitably the consequences are enormous.
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Many companies turned traditionally !unctional products into innovative products.
'ow can a company overcome this mismatch. There are two obvious ways to achieve
that. (ither by making its product !unctional again or by making its supply chain
responsive. The correct decision depends on whether the product is su!!iciently
innovative so that it can <usti!y the cost o! making the supply chain responsive.
Turning your product !rom innovative to !unctional makes sense when the variety
o!!ered is not really necessary. For instance there are 4= types o! toothpaste. %ho
really needs 4= types o! toothpaste& 5>? has already simpli!ied many o! its
-n the other hand when a company has an e!!icient supply chain !or its innovative
products the solution is to make some o! them !unctional and organize a responsive
supply chain !or the rest o! them. For e$ample Fiat should not use the same e!!icient
chain to supply 5unto and Ferrari F@;A. 1t must do so !or 5unto but it should also
organize a responsive supply chain !or the Ferrari.
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Companies have putted a lot o! e!!ort to reduce physical costs in their production line.
2lowly but stably companies realize that better coordination within the chain will
increase their pro!its. #ll the partners should have access to everydays demand
applying an electronic data interchange system so that they can react properly.
Coordination within the supply chain leads to reduction o! inventories. #s a result
service level reaches BAA8 and pro!its can rise up to 7A8. 1n thet point it must be
apprehended that consumers o! !unctional products o!!er companies predictable
demand in e$change o! a good product in a reasonable price. ,ou should not disturb
this honest relationship. Functional products have a price3sensitive demand. "eep
seasonal discounts will create spikes on demand which they will reduce the
predictability o! demand.
There are two types o! games !or a manu!acturer to play within the chain)
cooperative and competitive. #ssuming that chain costs are !i$ed partners now in a
competitive chain struggle !or a bigger share o! the pro!its. These negotiations can be
!ierce. 1n consequence retailers are not willing to share in!ormation about their costs
and as a result the per!ormance o! the chain drops. (verybody cares !or a bigger
share and not !or the enlargement o! the pie
-n the contrary in cooperative supply chains the manu!acturer establishes a !low o!
in!ormation capable to reassure the responsiveness o! the chain. #s the retailers make
more money on your product they pay more attention to them providing more sel!
space !or e$ample. For this reason you will realize that your sales are rising up
quickly. -n a cooperative supply chain everybody cares !or the enlargement o! the
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"ue to mass customization the unpredictability o! demand which is inherent in
innovative products con!uses the supply chains. Companies that grew up in an
oligopoly do not accept their !orecast errors and they tend to push their employees to
try harder. 1n !act the best to be done is to accept this uncertainty as something
positive because risk is connected to pro!it. 'igh risk declares high pro!it margins
and the opposite.
The problem in production scheduling o! innovative products is the unreliability o!
the !orecasts. Cut i! you sum up all the !orecasts !or your products the overall
!orecast you will get will be credible enough to count on it. Thats the base o! our
thoughts concerning the reduction o! the unpredictability o! the demand. -! course
this kind o! strategy has huge impacts on the way the supply chain !unctions.
2ince you have made the overall !orecast you are able to begin the mass production
o! products without customizing them. ,our products are now in a DgreyE !orm which
means that they are as closer as possible to the !inished goods but they are not
customized yet. The customization is made according to the order that the customer
has already given. This policy is called push3pull.
#part !rom push3pull policy it is also very important to reduce lead times and have
real in!ormation !rom the market as soon as possible. To achieve the !irst one it is
!undamental to accelerate the e$change o! in!ormation within the chain as much as
possible. 1nternet can help you a lot in that point. For the second one in order to have
a !irst sense about the market trends you have to !orce your retailers to give you early
orders. Cased on these in!ormation you can improve your production schedule
Finally once uncertainty has been reduced as much as possible you can deal with the
residual uncertainty with bu!!ers o! inventory or e$cess o! capacity. 2port -bermeyer
a !ashion ski3wear manu!acturer applied these methods and achieved more than 668
product availability as well as an increase o! pro!its by FA8
The importance o! the in!ormation !low within the chain has already been e$plained.
(nterprise 9esources 5lanning so!tware help us to get in!ormation about the
positioning o! inventories and the physical costs o! the production line. The problem
is that the credibility o! this so!tware depends on the employee who inputs data into
the system. "oes he understand the signi!icance o! what he does& 1 am a!raid that
particularly in ?reece he does not. Many companies are !acing problems with their
M95 and (95 so!tware and 1 think that this is one o! the root causes. 2o be!ore we
trust and use the outcomes o! these so!tware we must be sure that they are showing
us the real picture. 2omething else that we must keep in mind is that all these
methods and all these so!tware do not decide instead o! us. They o!!er us valuable
in!ormation which can help us to evaluate the situation and decide properly. #t the
end it is always up to ;7 to decide.