What types of innovative products do managers need to differentiate when setting their supply

chain strategies?  
Which supply chain strategy should managers follow for a particular type of innovative
products?  
Today we often divide product innovations into two groups: (1) sustaining and (2) disruptive
innovations (Christensen 2013). Sustaining innovations aim to improve the performance of
existing products along the dimensions the customers have valued. This type of innovation can
be radical, resulting in the development of really new products or incremental, leading to the
development of incrementally new products. On the other hand, disruptive innovations aim to
develop a new product that helps companies enter a new market. This type of innovation results
in the development of niche products that have some features appreciated by some customers,
but they are on average inferior to existing products.  

If niche products are nurtured successfully by sustaining innovations, they can be promoted as
popular products that create value for most customers. Looking again at the case of Apple, the
company entered the portable music devices market with its first-generation iPods in 2001,
devices that were developed after a disruptive innovation. The market had been previously
dominated by Sony products (e.g., Sony Walkman and Discman) for a long time. Apple sold
around 125,000 first-generation iPods worldwide in 2001, 600,000 second-generation iPods in
2002, and 2 million third-generation iPods in 2003. The company achieved a considerable
market share in 2005 with fourth-generation iPods whose sales exceeded 20 million worldwide.
The second- and third-generation iPods were incrementally newer versions of the first-generation
devices. However, the fourth generation was developed after a radical, sustaining innovation,
including a color display and click-wheel technology.  

The iPod illustrates how Apple developed a truly niche product, then incrementally revamped it
before making a really new product in its fourth generation.  

Before making any innovation decisions, it is important to understand the characteristics of

functional and innovative products.  

Functional products are basic products characterized by predictable demand, low profit margin,
and long product life cycle. These products require efficient supply chains that help to minimize
cost and warrant a positive profit margin.

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Delivery reliability measures the fraction of customer demand that is satisfied within the promised
delivery lead time.

For example: companies offering products based on the CTO or MTO model, delivery reliability capture
the percentage of orders that are delivered within the promised delivery lead time. Given the nature of
demand and supply uncertainty, it is obviously more expensive to provide higher level of services.
Essentially, firm have to trade-off inventory cost and stock-out costs to arrive at the optimum services
level.

In the MTS business, a firm has to keep higher inventory if it is to offer higher levels of service. Firms in
the CTO business will have to hold higher inventory before the order penetration point and after that
slack capacity in the system if they want to offer higher delivery reliability to customers.