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Supply chains in many industries suffer from an excess of some products and a shortage of others owing to an inability to
predict demand. A good structure in the supply chain can avoid such problems and reduce the costs. A framework was
developed to devise the supply chain of a company based on the nature of their products. This framework helps to understand
the nature of the demand for the products and devise the supply chain that can best satisfy that demand.
The first step in devising an effective supply-chain strategy is therefore to consider the nature of the demand for the
products ones company supplies. Important aspects are product life cycle, demand predictability, product variety,
market standards for lead time and services. Considering the demand patterns of the products, they can be divided in two
categories: primarily functional or primarily innovative.
Functional products include many things people buy in the grocery store, retail outlet and may other shops. Because such
products satisfy basic needs, which dont change much over time, they have stable, predictable demand and long life cycles.
But their stability invites competition, which often leads to low profit margins. To avoid low margins, many companies
introduce innovations in fashion or technology to give customers an additional reason to buy their offerings.
Innovative products can help a company to achieve higher profit margins, but makes demand for them unpredictable. In
addition, their life cycle is short usually just a few months and with a great variety of these products. These characteristics
further increase unpredictability. With their high profit margins and volatile demand, innovative products require a
fundamentally different supply chain than stable, low-margin functional products.
The supply chain performs two distinct types of functions: a physical function and a market mediation function. A supply
chains physical function is readily apparent and includes 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. Less visible but equally important is
market mediation, whose purpose is 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 and sold at a loss or when supply falls short of demand, resulting in lost
sales opportunities and dissatisfied customers.
The predictable demand of functional products makes market mediation easy because a nearly perfect match between
supply and demand can be achieved. Companies that make such products are thus free to focus almost exclusively on
minimizing physical costs. For this reason, companies usually create a schedule for assembling finished goods for at least the
next month. In this instance, the important flow of information is the one that occurs within the chain as suppliers,
manufacturers, and retailers coordinate their activities in order to meet predictable demand at the lowest cost. In this case the
primary focus are the physical costs and to gain the physical efficiency through also some program as the continuous
replenishment.
With innovative products the approach has to be different. The uncertain market reaction to innovation increases the risk of
shortages or excess supplies. The costs of these shortages are high and caused by the high profit margins and the importance of
early sales in establishing market share. The cost of obsolescence and excess supplies are on the other side the same high.
Hence market mediation costs predominate for these products, and they, not physical costs, should be managers primary focus.
Most important in this environment is to read early sales numbers or other market signals and to react quickly, during the new
products short life cycle. The critical decisions are about where in the chain to position inventory and available production
capacity in order to hedge against uncertain demand. Suppliers should be chosen for their speed and flexibility, not for their
low cost. A company should be directed to reduce the sales opportunities due to stockouts through increased speed, flexibility
and responsiveness to the market.
The next step is to decide whether their companys supply chain is physically efficient or responsive to the market. The
following table describes a physically efficient and a market responsive supply chains.
Having determined the nature of their products and their supply chains priorities, companies can employ a matrix to formulate
the ideal supply-chain strategy. The following table matches the supply chain with the product.
The reason a position in the right up end cell doesnt match is simple:
for any company with innovative products, the rewards from
investments in improving supply chain responsiveness are usually
much greater than the rewards from investments in improving the
chains efficiency. The same for the link down end cell for the
functional products.
For this reason Compaq decided to continue producing certain highvariety, short-life-cycle circuits in-house rather than outsource them to a low-cost Asian country, because local production gave
the company increased flexibility and shorter lead times. World Company, a leading Japanese apparel manufacturer, produces
its basic styles in low-cost Chinese plants but keeps production of high-fashion styles in Japan, where the advantage of being
able to respond quickly to emerging fashion trends more than offsets the disadvantage of high labor costs.
Sources: - Marshall L. Fisher, What is the Right Supply Chain for Your Product? (Harvard Business Review, 1997)
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Many companies have found that supply chain management initiatives have greatly increased their profitability, reduced
inventory, and improved their ability to match supply with demand. But short lifecycle products -- like fashion apparel or toys
-- are a cutting-edge challenge in supply chain management. Complex, long-term forecasts may have little meaning, while even
the conventional wisdom of experienced retailers may have limited relevance in a unique and rapidly changing market
environment. Use of an eclectic and flexible planning program such as Accurate Response may hold the key.
INTRODUCTION
Supply Chains in the 1990's: Good News and Bad News
The 1990s have witnessed substantial progress in supply chain management for fast moving consumer products like food and
basic apparel as companies recognized the value of sharing information and working together with their channel partners. The
results in many cases have been outstanding food companies like Campbell Soup and Barilla, a pasta manufacturer in Italy,
have doubled inventory turns for their retail customers while maintaining or increasing fill rates. Barilla, for example, increased
fill rates from 98.8 % of sales to 99.8 % of sales at selected distribution centers by changing information flow and partnerships
in the supply chains.
(Figure 1)Finished good demand patterns (top graph), versus real demand patterns (bottom graph).
Figure 5.
Accurate Response is a crucial tool used by the company in achieving effective supply chain management. It
incorporates "Information-based Forecasting.
1. Use a small amount of sales data early in the life of the product to update forecasts. We've found that effective use of
early sales data typically reduces the forecast error margin from +/- 50-100% to about +/- 10%.
2. At any point in time and at each point in the supply chain, choose inventory levels for a given product to maximize over
the life of the product, total dollar gross margin less the cost of inventory carrying and obsolescence. Among other things,
this requires estimating a margin of error on the forecast and to help do this we ask several forecasters to independently
predict demand and use the dispersion of their forecasts as a measure of risk.
3. Use various approaches to reduce lead-time to be better able to react to early sales information.
TABLE 1
Apparel/Footwear
* David's Bridal
* Federated (Macy's)
* Gap Inc. (Old Navy)
* JC Penney
* The Limited
* Philips Van Heusen (GH Bass)
* Maurices
* Zara
* Nine West Group
* Footstar (Meldisco)
Books, CDs,
Theme stores
* Borders Group
* Warner Bros. Studio Stores
* The Wherehouse
* World Co.
* Zany Brainy
* The Disney Store
* Sears
* Tiffany & Co.
* QVC
* Marks & Spencer
* Iceland Frozen Foods
* HE Butt
* Christmas Tree Shops
* CVS
* Ahold