Functional Versus Innovative Products

FUNCTIONAL Mature product Low product variety Predictable demand Established product categories Low margins Low forecasting error INNOVATIVE Early life cycle stage High product variety Unpredictable demand, e.g., fashions New product categories High margins High forecasting error

Efficient Versus Market-Responsive Supply Chains

Serve different functions  Efficient movement (F)  Market mediation (I) Meet different criteria  Asset management (F)  Flexibility (I)

Market Mediation Costs

Total Cost = Physical costs (production + transportation + inventory) + market mediation costs (stock-outs + markdowns)

Market mediation costs generally are negligible for functional products. Just create a schedule and freeze it or if competition is minimal, let customers wait Market mediation costs can be very high for (truly) innovative products, but they might be worth it if profits are high enough. Still, if market mediation costs can be reduced, profits can be even higher. Market mediation costs can be reduced by enhanced responsiveness.

Enhancing Responsiveness
Reduce excessive and unnecessary variety Buffer inventory of parts Use leading indicators Use common parts and postpone differentiation Cut lead-times with lean manufacturing

Matching Supply Chains with Products

Functional Products Efficient Supply Chain Innovative Products

Match

Mismatch

Responsive Supply Chain

Mismatch

Match

Campbell Soup
Continuous replenishment Retailers inform Campbell via EDI every morning of their demand and inventory levels, then Campbell replenishes within agreed upper and lower inventory limits Retailers inventories dropped by 50% Campbell could forecast demand more accurately No price promotions allowed Campbells costs dropped and retailers sales rose (win-win)

Mass Customization
National Bicycle  Found a profitable high margin segment: sports bikes  Customers can choose from two million options  Reliable two week delivery  Requires three times more labor than mass production Lutron Electronics  High modularization of components  Software programming of lighting features  Flexible manufacturing

Sport Obermeyer
Speculative production capacity vs reactive production capacity Commit to half of production early in season via Early Write Shorten lead-time (express mail for information, not products) Risk-based production sequencing (what to make early or late in the season Accurate Response - Forecast accuracy related to low variance among estimators Cost of overproduction and underproduction was cut in halfand increased profits by 60%