Supply Chain Strategies I: Aligning Strategies; Efficiency and Cost Savings (back to catalog)

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...Functional products are likely to have more stable demand patterns and less forecast error than innovative products. Also, inventory of functional products is less likely to become obsolete quickly, compared to inventory of innovative or "fashion-oriented" products. These differences will be important as we explore supply chain strategies.

The table below lists five characteristics, important to supply chain management, on which we would expect functional and innovative products to differ.1 Read the statement next to each characteristic, and select whether you think it is generally true or false. When you have selected an answer for each of the five characteristics, press "Show Answers" to see the correct answers.

Product Characteristic Statement  True/False  Answer
1. Product life cycle (PLC):
how long the product is viable in the marketplace
Product life cycle is generally longer for functional products than for innovative products.
True
False
2. Contribution margin:
profit margins for the specific product
Contribution margin is generally lower for innovative products than for functional products
True
False
3. Sales forecast error:
difference between forecasted and actual demands
Sales forecast error is generally higher for innovative products than for functional products.
True
False
4. Number of markdowns:
number of times price must be reduced to sell inventory
Product markdowns are generally more common for functional products than for innovative products.
True
False
5. Stockout rate:
how often the product stocks out
Observed stockout rates are generally higher for functional products than for innovative products.
True
False

The typical functional product has more predictable demand and more competition; contribution margins are driven down by that competition. The typical innovative product has less predictable demand, less competition at the outset, and generally higher margins. However, the unpredictability of demand also creates overstocks for some Stock-Keeping Units (SKUs) and shortages for others, so that for innovative products we would expect to see both higher markdowns (at end-of-season) and higher out-of-stock situations. For example, these two costs are particularly high in the apparel industry; they have been estimated to be as high as 30% of all costs for apparel companies and apparel supply chains2...


1 Adapted from Fisher, Marshall, "What is the Right Supply Chain for your Product", Harvard Business Review, March-April 1997.
2 Industry sources.

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Title: Supply Chain Strategies I: Aligning Strategies; Efficiency and Cost Savings

Rating:
4.4 / 5  (1806 ratings)

Total Reading Time: Approx. 1 - 2 hours (for average readers)

Word Count: Approx. 9,000 words

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Contents

  1. Introduction to Supply Chain Strategies
  2. Functional vs. Innovative Products
  3. Efficient vs. Responsive Supply Chain Strategies
  4. Aligning Products and Strategies
  5. Product Life Cycle Revisited
  6. Improving Efficient Supply Chains
  7. Beer Game Introduction
  8. Beer Game Simulation
  9. Beer Game Results
  10. Bullwhip Effect: Importance and Causes
  11. Cause 1: Information Distortion
  12. Cause 2: Order Batching
  13. Cause 3: Promotions
  14. Cause 4: Allocation Gaming
  15. Counteracting Information Distortion: Forecasting Problems and the Hockey Stick Effect
  16. Counteracting Information Distortion: Vendor-Managed Inventory (VMI)
  17. Counteracting Information Distortion: Supplier Managed Availability (SMA)
  18. Counteracting Information Distortion: Reducing Lead Times, Reserving Capacity, and Direct Sales
  19. Counteracting Information Distortion: Keeping Safety Stocks Steady
  20. Counteracting Order Batching
  21. Counteracting Promotions
  22. Counteracting Allocation Gaming
  23. Conclusions
  24. Test Your Knowledge
  25. Feedback
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