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 CostsTotal 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 Chainswith Products

Match

Mismatch

Mismatch

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Functional Products Innovative Products

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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

• Retailer’s inventories dropped by 50%

• Campbell could forecast demand more accurately

• No price promotions allowed

• Campbell’s 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 half- and increased profits by 60%