Operations and Supply Chain Management The Core

GLOBAL SOURCING AND PROCUREMENT chapter 13 433
cycles. But their stability invites competition, which often leads to low profit margins.
Specific criteria for identifying functional products include the following: product life
cycle of more than two years, contribution margin of 5 to 20 percent, only 10 to 20 product
variations, an average forecast error at time of production of only 10 percent, and a lead
time for make-to-order products of from six months to one year.
To avoid low margins, many companies introduce innovations in fashion or technology
to give customers an additional reason to buy their products. Fashionable clothes and
personal computers are good examples. Although innovation can enable a company to
achieve higher profit margins, the very newness of the innovative products makes demand
for them unpredictable. These innovative products typically have a life cycle of just a few
months. Imitators quickly erode the competitive advantage that innovative products enjoy,
and 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.
Exhibit 13.3 summarizes the differences between functional and innovative products.
We expand on this idea by focusing on the “supply” side of the supply chain. While the
Supply Chain Uncertainty Framework captures important demand characteristics, there
are uncertainties revolving around the supply side that are equally important drivers for the
right supply chain strategy.
A stable supply process is where the manufacturing process and the underlying technology
are mature and the supply base is well established. In contrast, an evolving supply
process is where the manufacturing process and the underlying technology are still under
early development and are rapidly changing. As a result, the supply base may be limited
Innovative products
Products such as
fashionable clothes
and high-end
personal computers
that typically have
a life cycle of just a
few months.
Stable supply
process
A process where
the underlying
technology is stable.
Evolving supply
process
A process where
the underlying
technology changes
rapidly.
Supply Chain Uncertainty Framework
exhibit 13.3
PRODUCT (DEMAND) CHARACTERISTICS
FUNCTIONAL
INNOVATIVE
Manufacturing
(Supply) Process
Characteristics
Stable
Evolving
Efficient Supply Chain
Grocery, basic apparel,
food, oil and gas
Risk-Hedging Supply
Chain
Hydroelectric power, food
dependent on weather
Responsive Supply Chain
Fashion apparel, low-end
computers, seasonal
products
Agile Supply Chain
Cell phones, highend
computers,
semiconductors
PRODUCT (DEMAND) CHARACTERISTICS
MANUFACTURING (SUPPLY) PROCESS CHARACTERISTICS
FUNCTIONAL INNOVATIVE STABLE EVOLVING
Demand Predictable Unpredictable Breakdowns Few Higher
Product Life Long Short Process Yield High Lower
Inventory Value Low High Quality Problems Few More
Product Variety Low High Supply Sources Many Few
Volume High Low Process Changes Few Many
Stock-out Cost Low High Lead Time Dependable Difficult to predict
Based on research conducted by Marshall Fisher (University of Pennsylvania) and Hau Lee (Stanford University)