Summary: What Is The Right Supply Chain For Your Product?

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• 1 Introduction

• Performance of many supply chains can be very bad. In some cases, costs can rise to unprecedented levels. Why?

  Because of adversarial relations between supply chain partners as well as dysfunctional industry practices such as an overreliance on price promotions.

• Why do supply chains waist so much?

  Supply chains in many industries suffer from an excess of some products and a shortage of others owing to an inability to predict demand. 

• Why haven't new ideas and technologies led to improved performance?

  Because managers lack a framework for deciding which ones are best for their particular company's situation.

• What is the first step in devising an effective supply-chain strategy?

  Considering the nature of the demand for the products one's company supplies.

• Products can be classified in two categories due to demand patterns. Which categories?

  1. Functional products
  2. Innovative products

• 2 Is your product functional or innovative?

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• What are functional products?

  Functional products include the staples that people buy in a wide range of retail outlets, such as grocery stores and gas stations. Because 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.

• What are innovative products?

  Although innovation can enable a company to achieve higher profit margins, the very newness of innovative products makes demand for them unpredictable. In addition, their life cycle is short - usually just a few months - because as imitators erode the competitive advantage that innovative products enjoy, companies are forced to introduce a steady stream of newer innovations. The short life cycles and the great variety typical of these products further increase unpredictability.

• What is the supply chain's market mediation function?

  Market mediation has the purpose to ensure that the variety of products reaching the marketplace matches what consumers want to buy.

• Why makes predictable demand of functional products market mediation easy?

  Because a nearly perfect match between supply and demand can be achieved. Companies that make such products are thus free to focus almost exclusively on minimizing physical costs - a crucial goal, given the price sensitivity of most functional products.

• Why is focusing only on physical costs the wrong approach for innovative products?

  The uncertain market reaction to innovation increases the risk of shortages or excess supplies. High profit margins and the importance of early sales in establishing market share for new products increase the cost of shortages. And short product life cycles increase the risk of obsolescence and the cost of excess supplies. Hence market mediation costs predominate for these products, and they, not physical costs, should be managers' primary focus.