MGT324 What Is the Right Supply Chain for Your Product Written Assignment Read the article “What is the right supply chain for your product?” and provide y

MGT324 What Is the Right Supply Chain for Your Product Written Assignment Read the article “What is the right supply chain for your product?” and provide your response based on the article.

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Consider this scenario – You are a management consultant and you have 2 clients.

Client 1 is a computer manufacturer.

Client 2 is a manufacturer of oral hygiene products such as toothpaste, mouthwash etc.

Your clients are asking you “What kind of supply chain should I have for my products?”

What advice would you give to these two clients?

Read the article and provide your response based on the article. Provide adequate reasoning.

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One or two line responses will not suffice. Ideal length of response – about 1 page (single spaced)

You should not be copying and pasting sentences from the article. Understand the concepts from the article and provide responses in your own words. What is the Right Supply
Chain for Your Product?
by Marshall L. Fisher
Harvard Business Review
Reprint 97205
HarvardBusinessReview
MARCH-APRIL 1997
Reprint Number
ARIE DE GEUS
THE LIVING COMPANY
97203
DEVELOPING GLOBAL NETWORKS
WALTER KUEMMERLE
BUILDING EFFECTIVE R&D CAPABILITIES ABROAD
97206
KASRA FERDOWS
MAKING THE MOST OF FOREIGN FACTORIES
97204
GEORGE S. DAY
STRATEGIES FOR SURVIVING A SHAKEOUT
97202
MARSHALL L. FISHER
WHAT IS THE RIGHT SUPPLY CHAIN FOR YOUR PRODUCT?
97205
JOHN CASE
OPENING THE BOOKS
97201
JOAN MAGRETTA
HBR CASE STUDY
WILL SHE FIT IN?
97208
CHRISTINE W. LETTS,
WILLIAM RYAN,
AND ALLEN GROSSMAN
SOCIAL ENTERPRISE
VIRTUOUS CAPITAL: WHAT FOUNDATIONS CAN LEARN FROM
VENTURE CAPITALISTS
WILFRIED VANHONACKER
WORLD VIEW
ENTERING CHINA: AN UNCONVENTIONAL APPROACH
97210
BOOKS IN REVIEW
MANAGING IN THE AGE OF GURUS
97209
EILEEN SHAPIRO
97207
What Is the Right Supply
Chain for Your Product?
A simple framework can help you figure out the answer.
by Marshall L. Fisher
Never has so much technology and brainpower been
applied to improving supply chain performance. Point-ofsale scanners allow companies to capture the customer’s
voice. Electronic data interchange lets all stages of the supply chain
hear that voice and react to it by using flexible manufacturing,
automated warehousing, and rapid logistics. And new concepts such
as quick response, efficient consumer response, accurate response,
mass customization, lean manufacturing, and agile manufacturing
offer models for applying the new technology to improve performance.
Nonetheless, the performance of many supply chains has never been worse. In some
cases, costs have risen to unprecedented levels because of adversarial relations between
supply chain partners as well as dysfunctional industry practices such as an overreliance
HARVARD BUSINESS REVIEW
March-April 1997
Copyright © 1997 by the President and Fellows of Harvard College. All rights reserved.
EFFECTIVE SUPPLY CHAINS
on price promotions. One recent study of the U.S.
food industry estimated that poor coordination
among supply chain partners was wasting $30 billion annually. Supply chains in many other industries suffer from an excess of some products and a
shortage of others owing to an inability to predict
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. Fashion apparel and personal computers are
obvious examples, but we also see
successful product innovation where
we least expect it. For instance, in
the traditionally functional category
of food, companies such as Ben &
Jerry’s, Mrs. Fields, and Starbucks
Coffee Company have tried to gain
an edge with designer flavors and
innovative concepts. Century Products, a leading manufacturer of children’s car seats,
is another company that brought innovation to a
functional product. Until the early 1990s, Century
sold its seats as functional items. Then it introduced a wide variety of brightly colored fabrics and
designed a new seat that would move in a crash to
absorb energy and protect the child sitting in it.
Called Smart Move, the design was so innovative
that the seat could not be sold until government
product-safety standards mandating that car seats
not move in a crash had been changed.
Although innovation can enable a company to
achieve higher profit margins, the very newness of
innovative products makes demand for them unpredictable. In addition, their life cycle is short –
usually just a few months – because as imitators
erode the competitive advantage that innovative
products enjoy, companies are forced to introduce
a steady stream of newer innovations. The short
life cycles and the great variety typical of these
products further increase unpredictability.
It may seem strange to lump technology and fashion together, but both types of innovation depend
for their success on consumers changing some
aspect of their values or lifestyle. For example, the
market success of the IBM Thinkpad hinged in part
on a novel cursor control in the middle of the keyboard that required users to interact with the keyboard in an unfamiliar way. The new design was so
controversial within IBM that managers had difficulty believing the enthusiastic reaction to the cursor control in early focus groups. As a result, the
company underestimated demand – a problem that
Before devising a supply chain,
consider the nature of the
demand for your products.
demand. One department store chain that regularly
had to resort to markdowns to clear unwanted merchandise found in exit interviews that one-quarter
of its customers had left its stores empty-handed
because the specific items they had wanted to buy
were out of stock.
Why haven’t the new ideas and technologies led
to improved performance? Because managers lack
a framework for deciding which ones are best for
their particular company’s situation. From my ten
years of research and consulting on supply chain issues in industries as diverse as food, fashion apparel, and automobiles, I have been able to devise such
a framework. It helps managers understand the nature of the demand for their products and devise the
supply chain that can best satisfy that demand.
The first step in devising an effective supplychain strategy is therefore to consider the nature of
the demand for the products one’s company supplies. Many aspects are important – for example,
product life cycle, demand predictability, product
variety, and market standards for lead times and
service (the percentage of demand filled from instock goods). But I have found that if one classifies
products on the basis of their demand patterns,
they fall into one of two categories: they are either
primarily functional or primarily innovative. And
each category requires a distinctly different kind of
supply chain. The root cause of the problems plaguing many supply chains is a mismatch between the
type of product and the type of supply chain.
Is Your Product Functional
or Innovative?
Functional products include the staples that people buy in a wide range of retail outlets, such as grocery stores and gas stations. Because such products
satisfy basic needs, which don’t change much over
time, they have stable, predictable demand and
106
Marshall L. Fisher is the Stephen J. Heyman Professor
of Operations and Information Management and codirector of the Fishman-Davidson Center for Service and
Operations Management at the University of Pennsylvania’s Wharton School in Philadelphia. His current
research focuses on how to manage the supply of products with hard-to-predict demand.
PHOTOS BY CHRISTOPHER MAKOS/SCANNER COURTESY OF TRIAD SYSTEMS
contributed to the Thinkpad’s
Functional Versus Innovative Products:
being in short supply for more
Differences in Demand
than a year.
With their high profit margins
and volatile demand, innovative
Functional
Innovative
products require a fundamentally
(Predictable
(Unpredictable
different supply chain than staDemand)
Demand)
ble, low-margin functional prodAspects of Demand
ucts do. To understand the difference, one should recognize that
a supply chain performs two disProduct life cycle
more than 2 years
3 months to 1 year
tinct types of functions: a physical function and a market mediaContribution margin*
5% to 20%
20% to 60%
tion function. A supply chain’s
physical function is readily apparent and includes converting raw
materials into parts, components,
Product variety
low (10 to 20 variants
high (often millions of
per category)
variants per category)
and eventually finished goods,
and transporting all of them from
one point in the supply chain to
the next. Less visible but equally
Average margin of
10%
40% to 100%
important is market mediation,
error in the forecast at
the time production is
whose purpose is ensuring that
committed
the variety of products reaching
the marketplace matches what
Average stockout rate
1% to 2%
10% to 40%
consumers want to buy.
Each of the two functions inAverage forced end-of0%
10% to 25%
curs distinct costs. Physical costs
season
markdown
as
are the costs of production, transpercentage of full price
portation, and inventory storage.
Market mediation costs arise
when supply exceeds demand and
Lead time required for
6 months to 1 year
1 day to 2 weeks
made-to-order products
a product has to be marked down
and sold at a loss or when supply
* The contribution margin equals price minus variable cost divided by price and is expressed
falls short of demand, resulting
as a percentage.
in lost sales opportunities and
dissatisfied customers.
The predictable demand of functional products
coordinate their activities in order to meet premakes market mediation easy because a nearly perdictable demand at the lowest cost.
fect match between supply and demand can be
That approach is exactly the wrong one for innoachieved. Companies that make such products are
vative products. The uncertain market reaction to
thus free to focus almost exclusively on minimizinnovation increases the risk of shortages or excess
ing physical costs – a crucial goal, given the price
supplies. High profit margins and the importance of
sensitivity of most functional products. To that
early sales in establishing market share for new
end, companies usually create a schedule for asproducts increase the cost of shortages. And short
sembling finished goods for at least the next month
product life cycles increase the risk of obsolescence
and commit themselves to abide by it. Freezing the
and the cost of excess supplies. Hence market meschedule in this way allows companies to employ
diation costs predominate for these products, and
manufacturing-resource-planning software, which
they, not physical costs, should be managers’ priorchestrates the ordering, production, and delivery
mary focus.
of supplies, thereby enabling the entire supply
Most important in this environment is to read
chain to minimize inventory and maximize proearly sales numbers or other market signals and to
duction efficiency. In this instance, the important
react quickly, during the new product’s short life
flow of information is the one that occurs within
cycle. In this instance, the crucial flow of informathe chain as suppliers, manufacturers, and retailers
tion occurs not only within the chain but also from
HARVARD BUSINESS REVIEW
March-April 1997
107
EFFECTIVE SUPPLY CHAINS
the marketplace to the chain. The critical decisions
to be made about inventory and capacity are not
about minimizing costs but about where in the
chain to position inventory and available production capacity in order to hedge against uncertain
demand. And suppliers should be chosen for their
speed and flexibility, not for their low cost.
Sport Obermeyer and Campbell Soup Company
illustrate the two environments and how the resulting goals and initiatives differ. Sport Obermeyer
is a major supplier of fashion skiwear. Each year,
95% of its products are completely new designs for
which demand forecasts often err by as much as
200%. And because the retail season is only a few
months long, the company has little time to react
if it misguesses the market.
In contrast, only 5% of Campbell’s products are
new each year. Sales of existing products, most of
which have been on the market for years, are highly
predictable, allowing Campbell to achieve a nearly
perfect service level by satisfying more than 98% of
demand immediately from stocks of finished goods.
And even the few new products are easy to manage.
They have a replenishment lead time of one month
and a minimum market life cycle of six months.
When Campbell introduces a product, it deploys
enough stock to cover the most optimistic forecast
for demand in the first month. If the product takes
off, more can be supplied before stocks run out. If
it flops, the six-month, worst-case life cycle affords
plenty of time to sell off the excess stocks.
How do goals and initiatives differ in the two environments? Campbell’s already high service level
leaves little room for improvement in market mediation costs. Hence, when the company launched
a supply chain program in 1991 called continuous
replenishment, the goal was physical efficiency. And it achieved
Physically Efficient Versus
that goal: the inventory turns of
Market-Responsive Supply Chains
participating retailers doubled. In
contrast, Sport Obermeyer’s uncertain demand leads to high marketPhysically Efficient
Market-Responsive
mediation costs in the form of
Process
Process
losses on styles that don’t sell
Primary purpose
supply predictable
respond quickly to
and missed sales opportunities
demand efficiently at the
unpredictable demand
due to the “stockouts” that oclowest possible cost
in order to minimize
cur when demand for particular
stockouts, forced
items outstrips inventories. The
markdowns, and
obsolete inventory
company’s supply chain efforts
have been directed at reducing
those costs through increased
Manufacturing focus
maintain high average
deploy excess buffer
speed and flexibility.
utilization rate
capacity
Although the distinctions between functional and innovative
Inventory strategy
generate high turns and
deploy significant
products and between physical
minimize inventory
buffer stocks of parts
efficiency and responsiveness to
throughout the chain
or finished goods
the market seem obvious once
stated, I have found that many
Lead-time focus
shorten lead time as
invest aggressively
companies founder on this issue.
long as it doesn’t
in ways to reduce
That is probably because prodincrease cost
lead time
ucts that are physically the same
can be either functional or innovative. For example, personal comApproach to choosing
select primarily for cost
select primarily for
suppliers
and quality
speed, flexibility, and
puters, cars, apparel, ice cream,
quality
coffee, cookies, and children’s car
seats all can be offered as a basic
functional product or in an innoProduct-design strategy
maximize performance
use modular design in
vative form.
and minimize cost
order to postpone
product differentiation
It’s easy for a company, through
for as long as possible
its product strategy, to gravitate
from the functional to the innovative sphere without realizing
that anything has changed. Then
108
HARVARD BUSINESS REVIEW
March-April 1997
Responsive
Supply Chain
Efficient
Supply Chain
its managers start to notice that
Matching Supply Chains with Products
service has mysteriously declined and inventories of unsold
Functional Products
Innovative Products
products have gone up. When this
happens, they look longingly at
competitors that haven’t changed
their product strategy and therefore have low inventories and
match
mismatch
high service. They even may steal
away the vice president of logistics from one of those companies,
reasoning, If we hire their logistics guy, we’ll have low inventory
and high service, too. The new
vice president invariably designs
mismatch
match
an agenda for improvement based
on his or her old environment:
cut inventories, pressure marketing to be accountable for its forecasts and to freeze them well into
the future to remove uncertainty,
and establish a rigid just-in-time delivery schedule
Supply Chains with Products.”) By using the mawith suppliers. The worst thing that could happen
trix to plot the nature of the demand for each of
is that he or she actually succeeds in implementing
their product families and its supply chain prithat agenda, because it’s totally inappropriate for
orities, managers can discover whether the process
the company’s now unpredictable environment.
the company uses for supplying products is well
matched to the product type: an efficient process
for functional products and a responsive process for
Devising the Ideal
innovative products. Companies that have either
Supply-Chain Strategy
an innovative product with an efficient supply
chain (upper right-hand cell) or a functional product
For companies to be sure that they are taking the
with a responsive supply chain (lower left-hand
right approach, they first must determine whether
cell) tend to be the ones with problems.
their products are functional or innovative. Most
For understandable reasons, it is rare for compamanagers I’ve encountered already have a sense of
nies to be in the lower left-hand cell. Most comwhich products have predictable and which have
panies that introduce functional products realize
unpredictable demand: the unpredictable products
that they need efficient chains to supply them. If
are the ones generating all the supply headaches.
the products remain functional over time, the comFor managers who aren’t sure or who would like to
panies typically have the good sense to stick with
confirm their intuition, I offer guidelines for classiefficient chains. But, for reasons I will explore
fying products based on what I have found to be typshortly, companies often find themselves in the
ical for each category. (See the table “Functional
Versus Innovative Products: Differences in Demand.”) The next step
is for managers to decide whether
their company’s supply chain is physically efficient or responsive to the
market. (See the table “Physically Efficient Versus Market-Responsive
Supply Chains.”)
Having determined the nature of
upper right-hand cell. The reason a position in this
their products and their supply chain’s priorities,
managers can employ a matrix to formulate the
cell doesn’t make sense is simple: for any company
with innovative products, the rewards from investideal supply-chain strategy. The four cells of the
ments in improving supply chain responsiveness
matrix represent the four possible combinations of
are usually much greater than the rewards from inproducts and priorities. (See the exhibit “Matching
Functional products require an
efficient process; innovative
products, a responsive process.
HARVARD BUSINESS REVIEW
March-April 1997
109
EFFECTIVE SUPPLY CHAINS
vestments in improving the chain’s efficiency. For
every dollar such a company invests in increasing
its supply chain’s responsiveness, it usually will
reap a decrease of more than a dollar in the cost of
stockouts and forced markdowns on excess inven-
processes for supplying those products. This phenomenon explains why one finds so many broken
supply chains – or unresponsive chains trying to
supply innovative products – in industries such as
automobiles, personal computers, and consumer
packaged goods.
The automobile industry is one
classic example. Several years ago,
I was involved in a study to measure
the impact that the variety of options available to consumers had on
productivity at a Big Three auto
plant. As the study began, I tried to
understand variety from the customer’s perspective by visiting a dealer near my
home in the Philadelphia area and “shopping” for
the car model produced in the plant we were to
study. From sales literature provided by the dealer,
I determined that when one took into account all
the choices for color, interior features, drivetrain
configurations, and other options, the company
was actually offering 20 million versions of the
car. But because ordering a car with the desired
options entailed an eight-week wait for delivery,
more than 90% of customers bought their cars off
the lot.
The dealer told me that he had 2 versions of the
car model on his lot and that if neither matched
my ideal specifications, he might be able to get my
choice from another dealer in the Philadelphia area.
When I got home, I checked the phone book and
found ten dealers in the area. Assuming each of
them also had 2 versions of the car in stock, I was
choosing from a selection of at most 20 versions of
a car that could be made in 20 million. In other
words, the auto distribution channel is a kind…
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