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What is the right

Supply chain for


your product ?

Need for a new framework

Technological advances such as POS scanners,


EDI, flexible and modular manufacturing are
intended to capture consumer demand efficiently
and make the supply chain more responsive.
However supply chains have only become less
efficient due to adverse supply chain relationships
leading to an annual loss of $30 billion.
The problem arises as result of the managers
inability to know which technologies to use, thus
a framework for such decisions is essential
SCM Autumn 2005

Functional vs. Innovative

Functional products are the products that


satisfy the basic needs of a consumer and do
not offer any special benefits. Food items,
stationary, petrol etc are examples.
Innovative products are those that are a result
of an innovation and intend to cater to
changing consumer needs. Fashion goods,
mobile handsets are examples.

SCM Autumn 2005

SCM Autumn 2005

Difference in approach

Supply chain management has two aspects :

Physical supply and distribution


Market mediation

Physical supply and distribution plays a much


more major role for functional products while
on the other hand the market mediation plays
a major role when it comes to innovative
products.
Hence, functional products supply chain must
be physically efficient while a Innovative
products should be market responsive
SCM Autumn 2005

SCM Autumn 2005

Mismatch of interests
The objectives that a firm should have for
a product is clear if nature of product is
known.
This however is not the case since the
difference is not always obvious.
Companies investing in physical efficiency
rather than responsiveness in case of
innovative products is a common conflict.

SCM Autumn 2005

Mismatch of interests

SCM Autumn 2005

Economics behind interests

A typical innovative product carries a


contribution margin of 40% and an average
stock-out rate of 25%.The lost profit resulting
from stock-outs alone is: 40% x 25%=10% of
sales. A responsive chain is of paramount
significance.
Functional products carry contribution margin
of 10% and an average stock-out rate of 1%
means a lost profit of 0.1% of sales-a
negligible cost compared to the significant
investments required to improve
responsiveness.
SCM Autumn 2005

Reasons for mismatch

Companies in the 70 had the freedom to make


keep lead times large and product lifecycles
were longer making efficiency the metric of
supply chains performance.
Today new products are the only way
consumers are attracted. But the same metrics
continue to be used.
Distribution becomes bottleneck between the
manufacturing plant and the consumer.

SCM Autumn 2005

The case of American Cars

A consumer demands
variety but fails get it
as a result of eight
week delivery time for
specific models.
The Big three had a
total of 20 million
versions of cars but
the dealers have only
20 models.

SCM Autumn 2005

Resolving the mismatch

Identify which products should be functional


and which products should be innovative.
A product that does not leverage much margin
in spite of variety and new products ought to
be viewed as functional. Ex Toothpaste.
Products that have an inherent charm attached
should be innovative with new introductions
made regularly. Ex. Car used in a Bond movie.
For Functional products focus on efficiency
For Innovative products, focus on
responsiveness
SCM Autumn 2005

Efficient supply of Functional product


The case of Campbell Soup

Soup is a typical functional product with


efficiency being the metric of supply chain
performance.
However traditional cost cutting models no
longer hold as a result of diminishing returns.
Focus was to exploit the predictable demand
Campbell therefore applied innovation in cost
cutting through

Continuous replenishment through EDI


Rationalized price promotion mechanisms
SCM Autumn 2005

SCM Autumn 2005

Benefits of Campbells initiative

Reduced inventory at retailers from 4 weeks to


2 weeks
Increase in margins by 50 %
Service level increased to 99.5 % from 98.5 %
Increased sales
Constant sales with less variation
Greater profit mobilization
Better supply chain relationships
SCM Autumn 2005

Responsive Supply of
Innovative Products

A four pronged strategy may be used to


make the supply chain apt for the product
Accept uncertainty as a part and parcel of the
products marketing.
Reduce uncertainty through improved data
sources and standardization of parts
Avoid uncertainty by reducing lead times and
improved supply chain relationships
Hedge against the remaining uncertainty
through liberalSCM
buffer
inventory
and
capacity.
Autumn 2005

Case of Sport Obermeyer

Backdrop and Strategy applied

Company made winter sports goods with the product


line differing every year
Commitments had to be made early when demand
was unknown since costs of express shipments were
prohibitive
Company focused on the four pronged strategy

Benefits

60 % reduction in lost sales and overstocking costs


99 % service level
A new framework called Accurate response
SCM Autumn 2005

Case of National Bicycles

Backdrop

Cycle sales fell due to


cost sensitivity
Labor costs of Japan
compare to those of
china and Korea

Strategy

Benefits

Reduced lead times of 2


weeks with 99.9 %
accuracy
Mass customization
Market share growth
from 4% to 29%

Target high margin


Challenges
sports cycle segment
Higher labor needed
Provide lots of choice
Poor capacity utilization
Use EDI to help in
in seasonal demand
building to order
Higher total costs
Reduce lead times
SCM Autumn 2005

Thank You

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