Harvard Business Review

What Is the Right Supply Chain for Your Product?

Summary:

With the increased focus on supply chain in past few decades, a number of new technologies are

being introduced for improvement of supply chain performance. Despite these technologies

companies has failed to bring a significant improvement. The reason for this can be summed up

into one line by saying that companies are unable to create a fit match between their products

and supply chain which results in issues in predicting product demand. Both functional and

innovative products differ in their supply chain type requirements, as they both varies in demand

patterns, life cycle and lead time. Supply chain basically has two functions, physical (including

all processes from converting raw material into finished good) and second one is mediation

(ensuring product and what customer wants to buy matches). Functional products have to

manage only physical function and its cost as due to predictable demand of these products

mediation function is easy. While for innovative product dealing with both the functions and

their cost is essential. For supply chains dealing with innovative products, focus is not on lower

cost but on supplier speed, flexibility and positioning of inventory with the help of accurate

information from marketplace to supply chain. Supply chains with functional products are

introduce to concept of Continuous Replenishment’ in order to keep cost low.

 For a supply chain to work rightly it is important to first understand nature

of product and then type of supply chain whether to be efficient or responsive and then jump

towards making a strategy. For companies with functional products all is good with efficient

supply chain while innovative products can’t go with it. Not having responsive supply chain will

cost companies, with innovative products, in the form of cost of inventory stock out and excess.

Having a responsive supply chain requires a high investment but this investment is not that

significant than loss that will result in form of stock outs. Many industries in recent era are

jumping into innovative products but biggest mistake that they are making is dealing these

products with a physical efficient supply chain rather than a responsive one. That’s the exact

answer that why companies despite new technologies have failed to improve performance.

Automobile and other gadget industries are biggest example of it. The best solution for this is

that instead of jumping into innovative products without any need a company must prefer to have

a mix of functional and innovative products. Innovative products should be introduced only

when it is required and not just following trend.

In a supply chain of functional products the biggest challenge is to deal with

price negotiations between manufacturer and retailer. As it is a competitive model and usually

prices are fixed so there is a continuous fight between suppliers and retailers for profit sharing, as

its margin is low. On contrary, biggest challenge to chain with innovative products is to deal with

demand uncertainty. Companies should accept that risk is always associated when profit margins

are high; no matter how much accurate you try to be in forecasting. After accepting the risk, a

company can devise three methods to manage uncertainty. First is to reduce it, but it is only after

accepting the risk that a company would be able to reduce it. Major risk in these supply chains is

shortages or excess due to longer lead times so second method is to avoid risk by increasing
flexibility. After taking appropriate steps both for avoiding and reducing risk third strategy is to

‘hedge’. To keep a buffer stock or excessive inventory will help company to deal with the risk

that is left behind even after all the steps to reduce and avoid that risk.

This article concludes that companies despite putting all their efforts and using

all the latest technologies are lagging behind because they are unable to discriminate between the

natures of their products and hence not choosing a right type of supply chain and strategy for

product.