ΑΡΙΣΤΟΤΕΛΕΙΟ ΠΑΝΕΠΙΣΤΗΜΙΟ ΘΕΣΣΑΛΟΝΙΚΗΣ

ΠΟΛΥΤΕΧΝΙΚΗ ΣΧΟΛΗ-ΤΜΗΜΑ ΜΗΧΑΝΟΛΟΓΩΝ ΜΗΧΑΝΙΚΩΝ

ΤΟΜΕΑΣ ΒΙΟΜΗΧΑΝΙΚΗΣ ΔΙΟΙΚΗΣΗΣ
ΑΚΑΔΗΜΑΪΚΟ ΕΤΟΣ 2004-2005

ΕΞΑΜΗΝΟ:10ο
ΜΑΘΗΜΑ:ΕΦΟΔΙΑΣΤΙΚΗ ΑΛΥΣΙΔΑ
ΔΙΔΑΣΚΩΝ:, Αναπλ. Καθηγητής
Σάνδρος Αλέξανδρος

What is the right supply chain for your product?

by Marshall L. Fisher

Executive summary

Θεσσαλονίκη, Μάρτιος 2005

Introduction
Much technology and brain power has been applied to improve supply chains.
Companies are able to capture customers’ voice by using sophisticated marketing
tools. Their goal is the accurate and quick response to market demands. Mass
customization, automated warehousing and agile manufacturing are the means leading
to that goal.

Despite these efforts, many supply chains have never been worse. Adversarial
relationships among partners as well as lack of coordination have lead, in many cases,
to an unpredictable rise of cost. The excess of one product and the shortage of
another is a common symptom. Why companies are unable to improve their supply
chain performance? How can you avoid these problems?

Is your product functional or innovative?

The most crucial issue is the comprehension of the connection between the nature of
demand and the type of supply chain you need. The fundamental problem is the
mismatch between the type of product and the type of supply chain.

Therefore you have to specify, first, the type of your product. Experience has shown
that there are two categories of products: functional and innovative. There are some
criteria , such as life cycle and t unpredictability of demand, to make up your mind
whether your product belongs to the first or the second category.

• Functional products
Functional products are those which satisfy basic needs, such as food and gas. These
products have long life cycles and predicable (usually stable) demand. Due to their
stability, functional products attract many competitors who desire a share of the
profits. Companies in order to avoid a decrease of their profits, introduce innovative
characteristics into their products. For example YOKOHMA, a Japanese tire
manufacturer, will soon offer colorful motorcycle tires! Due to innovation, companies
achieve higher profit margins and therefore they are forced to introduce a steady
stream of newer innovations. The variety of products constantly increases, as well as
the unpredictability of demand but life cycles are becoming shorter. In a few words,
your functional product becomes more and more innovative.

• Innovative products
Since I have defined functional products, it is easy to do the same for the innovative.
These products have short life cycles and it is very difficult to forecast their demand.
Innovative products usually depend on current fashion and life-style and they
generate all the supply headaches because of the uncertain market reaction that
increases the risk of having shortages or excess supplies.

Although the distinctions between functional and innovative products are obvious, the
fact that some products which are physically the same can be either functional or
innovative, is the reason why many companies find it difficult to understand the exact
nature of their product. Therefore to optimize the performance of your supply chain,
the first thing you have to do, is to think carefully and decide in which category your
product belongs.

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Supply Chains – the ideal strategy
There are two types of supply chains: efficient and responsive. As you can probably
guess, efficient chains are applied to functional products and responsive to innovative.
Let us see why.

A supply chain performs two different functions: a physical function and a market
mediation function. Each of the two functions incurs costs. Physical costs are these of
production, transportation and inventory storage. Market mediation costs arise when
supplies do not match with the demand.

The predictable demand of functional products makes physical costs much more
crucial than market mediation costs. Applying carefully forecast methods you can
achieve service level grater than 95%. As a consequence market mediation costs are
hold back. So, your primary concern is the physical function costs. To that end, the
stable production rate allows the companies to employ MRP software which organizes
and supervises the ordering, production and delivery of supplies. As a result,
inventory is minimized and production efficiency is maximized. The important flow
of information is within the chain in order to satisfy the demand at the lowest cost.
Suppliers are chosen for their low cost and not for their flexibility

On the contrary, this approach is completely wrong for innovative products. On this
occasion market mediation costs are the most important. This does not mean that there
are not any physical costs, but compared to market mediation costs are less
significant. It is very important for an innovative product to establish market share at
the beginning of its life, a fact that leads to the increase of the cost of shortages. Also,
the short life cycle increases the risk of obsolesce due to excess supplies. That’s why
market mediation costs are so crucial in that case. The important flow of information
is not only within the chain but it also is from the market to the chain. It is also
desirable, for the coordination of the chain, all the partners receive real time
information from the market. Finally, suppliers are not chosen for their low cost, but
for their agile production and their short lead times which allow them to respond
quickly to the market’s unpredictable demand.

Mismatches
Companies that manufacture functional products usually realize that they need an
efficient supply chain. If their products remain functional over time, companies stick
to efficient supply chains. On the other hand, it is very easy for a company to
transform its functional product into innovative through the introduction of any
innovation, without realizing that change. All of a sudden, service level drops and
inventories of unsold products go up. Despite the efforts to decrease inventories and
to restore service level, the number of the problems increases exponentially over
time.
Twenty years ago companies could supply an innovative product with an efficient
chain because market was allowing long lead times for delivery. For example, lead
times in computer industry were up to two years! Nowadays, the acceptable lead time
has dropped to a few days. Inevitably, the consequences are enormous.

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Matching supply chains with products
Many companies turned traditionally functional products into innovative products.
How can a company overcome this mismatch. There are two obvious ways to achieve
that. Either by making its product functional again or by making its supply chain
responsive. The correct decision depends on whether the product is sufficiently
innovative so that it can justify the cost of making the supply chain responsive.

Turning your product from innovative to functional makes sense when the variety
offered is not really necessary. For instance, there are 28 types of toothpaste. Who
really needs 28 types of toothpaste? P&G has already simplified many of its
products.

On the other hand, when a company has an efficient supply chain for its innovative
products, the solution is to make some of them functional and organize a responsive
supply chain for the rest of them. For example, Fiat should not use the same efficient
chain to supply Punto and Ferrari F430. It must do so for Punto, but it should also
organize a responsive supply chain for the Ferrari.

Efficient supply of functional products

Companies have putted a lot of effort to reduce physical costs in their production line.
Slowly but stably companies realize that better coordination within the chain will
increase their profits. All the partners should have access to everyday’s demand,
applying an electronic data interchange system, so that they can react properly.
Coordination within the supply chain leads to reduction of inventories. As a result
service level reaches 100% and profits can rise up to 50%. In thet point, it must be
apprehended that consumers of functional products offer companies predictable
demand in exchange of a good product in a reasonable price. You should not disturb
this honest relationship. Functional products have a price-sensitive demand. Deep
seasonal discounts will create spikes on demand which they will reduce the
predictability of demand.

There are two types of games for a manufacturer to play within the chain:
cooperative and competitive. Assuming that chain costs are fixed, partners now, in a
competitive chain struggle for a bigger share of the profits. These negotiations can be
fierce. In consequence, retailers are not willing to share information about their costs
and, as a result, the performance of the chain drops. Everybody cares for a bigger
share and not for the enlargement of the pie

On the contrary, in cooperative supply chains the manufacturer establishes a flow of

information, capable to reassure the responsiveness of the chain. As the retailers make
more money on your product, they pay more attention to them, providing more self
space for example. For this reason you will realize that your sales are rising up
quickly. On a cooperative supply chain, everybody cares for the enlargement of the
pie.

Responsive supply of innovative products - dealing with unpredictability

Due to mass customization, the unpredictability of demand, which is inherent in
innovative products, confuses the supply chains. Companies that grew up in an
oligopoly do not accept their forecast errors and they tend to push their employees to
try harder. In fact, the best to be done is to accept this uncertainty as something

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positive, because risk is connected to profit. High risk declares high profit margins
and the opposite.

The problem in production scheduling of innovative products, is the unreliability of

the forecasts. But if you sum up all the forecasts for your products, the overall
forecast you will get, will be credible enough to count on it. That’s the base of our
thoughts, concerning the reduction of the unpredictability of the demand. Of course
this kind of strategy has huge impacts on the way the supply chain functions.

Since you have made the overall forecast, you are able to begin the mass production
of products without customizing them. Your products are now in a “grey” form which
means that they are as closer as possible to the finished goods but they are not
customized yet. The customization is made according to the order that the customer
has already given. This policy is called push-pull.

Apart from push-pull policy, it is also very important to reduce lead times and have
real information from the market as soon as possible. To achieve the first one, it is
fundamental to accelerate the exchange of information within the chain as much as
possible. Internet can help you a lot in that point. For the second one, in order to have
a first sense about the market trends, you have to force your retailers to give you early
orders. Based on these information, you can improve your production schedule

Finally once uncertainty has been reduced as much as possible, you can deal with the
residual uncertainty with buffers of inventory or excess of capacity. Sport Obermeyer,
a fashion ski-wear manufacturer, applied these methods and achieved more than 99%
product availability as well as an increase of profits by 60%

Remarks
The importance of the information flow within the chain, has already been explained.
Enterprise Resources Planning software help us to get information about the
positioning of inventories and the physical costs of the production line. The problem
is that the credibility of this software depends on the employee who inputs data into
the system. Does he understand the significance of what he does? I am afraid that
particularly in Greece, he does not. Many companies are facing problems with their
MRP and ERP software and I think that this is one of the root causes. So, before we
trust and use the outcomes of these software, we must be sure that they are showing
us the real picture. Something else that we must keep in mind, is that all these
methods and all these software do not decide instead of us. They offer us valuable
information which can help us to evaluate the situation and decide properly. At the
end, it is always up to us to decide.

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