What is the Right Supply Chain for Your Product?

By Marshall L. Fisher

High profit margins and volatile demand, innovative products require a fundamentally different supply chain than stable, low-margin functional products.

Physical function: converting raw materials into parts, components, and eventually finished goods, and transporting all of them from one point in the supply chain to the next.

Market mediation: function ensuring 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. The flow of information is the one that occurs within the chain as suppliers, manufacturers, and retailers co-ordinate their activities in order to meet predictable demand at the lowest cost.

High profit margins and the importance of early sales in establishing market share for new products increases the cost of shortages.

Suppliers should be chosen for their speed and flexibility, not for their low cost.

Campbellís already high service level leaves little room for improvement in market mediation costs. In 1991, launched supply chain program called continuous replenishment, the goal was physical efficiency.

INNOVATIVE PRODUCTS == RESPONSIVE SUPPLY

CHAIN FUNCTIONAL PRODUCTS == EFFICIENT SUPPLY CHAIN

Most computer companies find themselves firmly positioned in the upper right-hand cell of the matrix. (i.e. INNOVATIVE PRODUCTS == EFFICIENT SUPPLY CHAIN)

The correct direction depends on whether the product is sufficiently innovative to generate enough additional profit to cover the cost of making the supply chain responsive.

Tooth paste is a product category in which a move to the left -- from innovative to functional -- makes sense.

Pursuing continuous replenishment made Campbellís aware of the negative impact that the overuse of price promotions can have on physical efficiency.

Retailers responded to the price cut by stocking up, a practice the industry calls forward buying. The shipment bulge to fulfil orders added costs throughout the Campbell system.

Smooth distribution means better profits for everyone. The cost of carrying inventory is about 25% per year. A two-week inventory reduction represents a cost savings equal to merely 1% of sales. Since the average retailerís profits equal about 2% of sales, this savings is enough to increase profits by 50%.

Uncertainty of demand is intrinsic to innovative products. They need to develop a responsive supply process. The first step is often to accept that uncertainty is inherent in innovation. It is possible to reduce uncertainty by finding sources of new data that can serve as leading indicators. Also, avoid uncertainty by cutting lead times and increasing the supply chains flexibility so that it can produce to order. And finally it can hedge against the remaining residual uncertainty with buffers of inventory.

Mass customisation: building the ability to customise a large volume of products and deliver them at close to mass-production prices (i.e. computers, bicycles)


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Written by Brian Wick, who is actually an optimist.

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