Functional Versus Innovative Products FUNCTIONAL INNOVATIVE Mature product

Functional Versus Innovative Products FUNCTIONAL INNOVATIVE • Mature product • Early life cycle stage • Low product variety • High product variety • Predictable demand • Unpredictable demand, e. g. , fashions • Established product categories • New product categories • Low margins • High margins • Low forecasting error • High forecasting error

Efficient Versus Market-Responsive Supply Chains • Serve different functions ü Efficient movement (F) ü Market mediation (I) • Meet different criteria ü Asset management (F) ü Flexibility (I)

Market Mediation Costs Total Cost = Physical costs (production + transportation + inventory) + market mediation costs (stock-outs + markdowns) • Market mediation costs generally are negligible for functional products. Just create a schedule and freeze it or if competition is minimal, let customers wait • Market mediation costs can be very high for (truly) innovative products, but they might be worth it if profits are high enough. • Still, if market mediation costs can be reduced, profits can be even higher. Market mediation costs can be reduced by enhanced responsiveness.

Enhancing Responsiveness • Reduce excessive and unnecessary variety • Buffer inventory of parts • Use leading indicators • Use common parts and postpone differentiation • Cut lead-times with lean manufacturing

Matching Supply Chains with Products Efficient Supply Chain Innovative Products Match Mismatch Responsive Supply Chain Functional Products Mismatch Match

Campbell Soup • Continuous replenishment • Retailers inform Campbell via EDI every morning of their demand inventory levels, then Campbell replenishes within agreed upper and lower inventory limits • Retailer’s inventories dropped by 50% • Campbell could forecast demand more accurately • No price promotions allowed • Campbell’s costs dropped and retailers sales rose (“win-win”)

Mass Customization • National Bicycle ü Found a profitable high margin segment: sports bikes ü Customers can choose from two million options ü Reliable two week delivery ü Requires three times more labor than mass production • Lutron Electronics ü High modularization of components ü Software programming of lighting features ü Flexible manufacturing

Sport Obermeyer • Speculative production capacity vs reactive production capacity • Commit to half of production early in season via “Early Write” • Shorten lead-time (express mail for information, not products) • Risk-based production sequencing (what to make early or late in the season • “Accurate Response” - Forecast accuracy related to low variance among estimators • Cost of overproduction and underproduction was cut in halfand increased profits by 60%