Competitive Priorities and

Performance Objectives II

Session 6
Dr. Chetna Chauhan
Session Content

 Gartner hype cycle

 Role of technologies in improving competitiveness
 Devising a Supply Chain
 Is Your Product Functional or Innovative?
 Physically Efficient Versus Market-Responsive Supply Chains
 Devising the Ideal Supply-Chain Strategy

2
Session Content
 Question
Alyssa’s Custom Cakes currently sells 4 birthday, 3 wedding, and 2 specialty cakes each
month for $45, $155, and $105 each, respectively. The cost of labor is $50 per hour
(including benefits) and it takes 90 minutes to produce a birthday cake, 240 minutes to
produce a wedding cake, and 60 minutes to produce a specialty cake. Alyssa’s current
multifactor productivity ratio is 1.30.

a. Use the multifactor productivity ratio provided to calculate the average cost of the
cakes produced.
b. Calculate Alyssa’s labor productivity ratio in dollars per hour for each type of cake.
(Labor Productivity Ratio = Total Output/ Total Man hours)
c. Based solely on the labor productivity ratio, which cake should Alyssa try to sell the
most?
d. Is there a type of cake Alyssa should stop selling?

2-3
 Solution
a. Use the multifactor productivity ratio provided to calculate the average cost of the cakes
produced.
Given: 4 birthday cakes * $45 = $180
3 wedding cakes * $155= $465
2 specialty cakes * $105 = 210
Total Revenue: $855 per month
Multifactor productivity ratio: Output/ Input
Therefore
Input = Output/ Multifactor productivity ratio
= 855/1.3
= $657.69
Total cost: $657.69
Average cost per cake: $ 73.08
Calculate Alyssa’s labor productivity ratio in dollars per hour for each type of cake.
Labor Productivity Ratio = Total Output/ Total Man hours
Birthday Cake= (4 cakes * $45/cake) / (4 cakes * 1.5 hour/cake)
= 180/6
= $30/hour

Wedding Cake= (3 cakes * $155/cake) / (3 cake * 4 hours/cake)

= 465/12
= $38.75/hour

Specialty Cake= (2 cakes * $105/cake) / (2cake * (1 hour/cake)

= 210/2
= $105/hour
Based solely on the labor productivity ratio, which cake should Alyssa try to sell the most?
Alyssa should sell Specialty cake the most for it has the highest labor productivity

Is there a type of cake Alyssa should stop selling?

Alyssa should stop selling Birthday cakes for it has the lowest labor productivity
 • Innovation Trigger: A potential technology
breakthrough kicks things off.
• Peak of Inflated Expectations: Early
publicity produces a number of success
stories
• Trough of Disillusionment: Producers of
the technology shake out or fail.
Investments continue only if the providers
improve their products to the satisfaction
of early adopters.
• Slope of Enlightenment: More instances of
how the technology can benefit the
enterprise start to crystallize
• Plateau of Productivity: Mainstream
Gartner hype cycle (Gartner, 2019)
adoption starts to take off
What is the Right Supply Chain
for Your Product?
A simple framework can help you figure out the by Marshall L. Fisher
answer.
Devising a Supply Chain
 Managers lack a framework for deciding which supply chains are best for their company's situation.

 A framework can help managers understand the nature of the demand for their products and devise the supply
chain that can best satisfy that demand.

 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 in- stock goods).

 On basis their demand patterns, they fall into one of two categories: 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.

9
 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.
 Such products satisfy basic needs, which don’t change much over time, they have stable, predictable demand
and long-life cycles.
 But their stability invites competition, which often leads to low profit margins.

Innovative products
 To avoid low margins, many companies introduce innovations in fashion or technology to give customers an
additional reason to buy their offering.
 E.g., Fashion apparel and personal computers.
 How is their life cycle?

10
 What is product lifecycle?
• Development: The product is in the ideation and conceptualization phase, and the
company is investing in R&D to bring the product to market.
• Introduction: The product is launched and begins to be sold. Sales are typically low in this
stage as the product is still unknown to the market.
• Growth: In this stage, sales begin to increase as the product gains acceptance among
consumers and the company begins to invest in marketing and production.
• Maturity: In this stage, sales growth begins to level off and the company may start to face
increased competition. The focus during this stage is typically on cost-cutting and improving
efficiency.
• Decline: In this stage, sales begin to decline as the product becomes outdated or is replaced
by newer, more innovative products. The company may begin to phase out production and
marketing of the product during this stage.
Is Your Product Functional or Innovative?

Contribution margin=
Price per unit- variable cost per unit

12
Is Your Product Functional or Innovative?

40% margin of error example:

If a forecasted sales are predicted to be

100 & margin of error is 40%

It means that the actual sales could be

anywhere between 60 and 140

13
 Physical function & market mediation function of SC

 A supply chain performs two distinct types of functions:

 A physical function
 A market mediation function.

A physical function

 A supply chain’s physical function is readily apparent and includes converting raw materials into parts,
components, and eventually finished goods, and transporting all of them from one point in the supply chain to
the next.

A market mediation function.

 Less visible but equally important is market mediation, whose purpose is ensuring that the variety of products
reaching the marketplace matches what consumers want to buy. 14
Physical and mediation costs
• Physical function  Physical costs
Costs of production, transportation, and inventory storage

• Mediation function  Market mediation costs

supply exceeds demand: product has to be marked down and sold at a
loss
supply falls short of demand: lost sales opportunities and dissatisfied
customers
Functional products
• Makes market mediation easy with a nearly perfect match between
supply and demand
• Companies that make such products can focus on minimizing physical
costs
• Companies usually create a schedule for assembling finished goods
• Use MRP to minimize inventory & maximize production efficiency
• Meet demand at lowest cost
• Flow of information and better coordination
• Will this work for innovative products?
 MRP vs ERP
• ERP (Enterprise Resource Planning) and MRP (Material Requirement Planning)
are two related but distinct systems
• MRP is a subset of ERP that focuses specifically on the management of raw
materials and components needed for production.
• MRP ensures that the right amount of materials is available at the right time to
support the production schedule.
• ERP is a broader system that encompasses many different functions and
processes beyond just MRP.
• ERP systems include modules for finance, human resources, procurement,
project management, and more.
• ERP provides single, integrated view of a company's operations.
Innovative products
• Uncertain market reaction to innovation: risk of shortages or excess
supplies
• High cost of shortage
• Short product life cycle: risk of obsolescence & cost of excess supplies
• Market mediation costs predominate
 Devising the Ideal Supply-Chain Strategy
 Having determined the nature of their
products and their supply chain’s priorities
managers can employ a matrix to
formulate the ideal supply-chain strategy.

 The four cells of the matrix represent the

four possible combinations of products and
priorities

Functional products require an

efficient process; innovative products,
a responsive process.
19
20
Creating responsive supply chains
• Hedging
• Cutting lead times
• Data as indicators
• Flexibility of manufacturing when demand materializes
Diversify supplier base
Invest in Technology
Encourage Collaboration and Cross-Functional Teams
Foster a Culture of Continuous Improvemen
• Different products but common components
Hedging
Hedging refers to strategies and techniques that companies use to manage the risks
associated with fluctuations in demand for their products or services. There are several
ways that companies can hedge against uncertain demand, including:
• Inventory Management: Companies can maintain safety stock levels, adjust order
quantities, or use just-in-time (JIT) inventory systems to manage fluctuations in demand.
• Forward Contracts: Companies can enter into forward contracts with suppliers or
customers to lock in prices and quantities for a specified period of time, reducing the
impact of demand fluctuations.
• Options Contracts: Companies can use options contracts to manage the risk of price
fluctuations for raw materials or finished goods.
• Diversification: Companies can diversify their product portfolio, customer base, and
supplier network to reduce the impact of demand fluctuations in any one area.
• Visibility: Make more informed decisions about production and inventory management.
Conclusion

 Devising the Ideal Supply-Chain Strategy

 Functional products require an efficient process; innovative products, a responsive process.

 There is a kind of schizophrenia in the way computer companies view their supply chains.

 Efficient Supply of Functional Products

 Functional products require an efficient process; innovative products, a responsive process.

 Responsive Supply of Innovative Products

24
Supply Chain 4.0
 Transition from traditional Automation Pyramid
Automation Pyramid Device to device communication
Ente
rpris
e
Reso
Company urce
Plan
ning
(ERP
)
Manufacturing
Line Execution System
(MES)

Process Supervisory Control and Data

Acquisition (SCADA)

Control Programmable Logic Controller (PLC)

Field
INDUSTRY 4.0
IMPACT ON SCs

Technology Levers and Six Value drivers

Impact- Service, Agility, Capital and Cost

FLEXIBLE ACCURATE EFFICIENT

Source: McKinsey, 2021

 Transforming functional areas in the business
Development
Company retains the product even after it is delivered

Production
Flexibility and customer focus

Logistics
Logistics will become more closely integrated into the overall value
chain

Services
“product-as-a-service” model

Marketing and Sales

End-to-end digital buying experience
 Development function

• Skilled manpower
• Products are resource • Cross-company infor- • Customer driven
Add new functionality mation sharing • Modular product design • Collaborative
•
• Additive manufacturing • System integration for • Interdisciplinary • Involvement of commu-
change requests nities

Resources
Information systems Organizational structure Culture

NOTE!
Rather than starting with a rigid finished product in
Business Processes
mind, it is becoming increasingly common to work
with a product vision that can keep evolving
 Production function

• High quality and avail- • Interdisciplinary teams

• Cyberphysical systems ability of data Knowledge sharing • Proactive sharing of best
• Real time information •
• Connecting various • More responsive practices
• Cross-functional teams
stakeholders • Seamless collaboration • Lean
• Data scientists

Resources Information systems Organizational structure Culture

Note
Making new value creation strategies necessary. I Business Processes
4.0 will give higher flexibility in terms of the product
features and the portfolio to meet customers’
individual needs
 Logistics function

• Real Time Location Sys- • Enables continuous • Greater decision- mak-

tems technology communication ing autonomy avail-
• Autonomous forklifts, • Easy change manage- able to logistics part- • Last-minute changes
trucks- can interact ment
• Transparency ners
• Digital twins

Resources Information systems Organizational structure Culture

Note
The primary function of logistics remains LOGISTICS
unchanged: to ensure the availability of the right
goods, in the right quantity, in the right place, at the
right time, for the right customer and at the right
cost.
 Services function

• Smart, connectivity • The development team • The boundaries of the

enabled products can use operating data to industry in which the Collective know-how
• Ecosystem in which all inform the product’s firm operates will be- sharing
the products in a value continued development come less clearly de-
chain contribute their fined
own data.

Information systems Organizational structure Culture

Resources

Note!
The traditional activity of only selling products that SERVICES
the company has made itself is increasingly being
superseded by new, solution driven service business
models