Logistics & Materials Handling Blog

The Right Supply Chain

by Paul Hinz
Filed under: Productivity

Choosing the right supply chain should be easier than ever before. This is because organisations now have an abundance of information and technology at their disposal to assist in structuring their supply chains. However, a common problem lies with an organisations ability to make sense of this material. Managers commonly make inadequate decisions based on consumer information. This is due to the lack of a framework stipulating which supply chain method is best for a company’s product type.

This week’s blog will examine how to choose the right supply chain for your business based on the type of products you sell.

Predicting Demand

The first stage in determining your supply chain is considering the nature of demand for your product. It is important to consider:

• Product life cycle
• Demand predictability
• Market standards for lead times and service

This will allow you to determine if the product is primarily functional or primarily innovative. Each requires a distinctively different supply chain and an understanding of both will help in avoiding an excess or shortage of stock.

Functional Products

Functional products are items that are bought regularly and are considered staples. They are widely available in retail outlets, such as, grocery and convenient stores and have a predictable long life cycle due to their stability, although, competition is high resulting in low profit margins.
Innovative Products

Innovative products are new products to the market that offer something different. These types of products can have a high profit margin, although they also have unpredictable demand patterns and require a profoundly different supply chain to fundamental products.

Graph 2

Which Type of Supply Chain?

Once you are aware of what type of product you are selling you are then able to determine what type of supply chain process is best suited to your business.

Physically Efficient Process

The Physically Efficient Process can be used when supplying a functional product with a predictable demand. This process has a cost minimising focus and a high manufacturing rate to ensure demand is consistently met for consumers.

As a perfect match between supply and demand can almost be achieved for these types of products, these companies are able to focus almost exclusively on minimising physical costs.

This strategy requires an important flow of information within the chain, as suppliers, manufacturers and retailers coordinate their activities in order to meet predictable demand at the lowest cost.

Market Responsive Process

The Market Responsive Process responds quickly to unpredictable demand patterns and can be used when supplying innovative products.

Market mediation costs are the main concern for this products supply chain and should be a manager’s primary focus. This is due to the increased risk of having either an excess or shortage of supplies.

Reacting quickly to early sales figures and market shares is the key to a successful supply chain in this situation. It is important to position inventory and available production capacity in order to counteract uncertain demand. Select suppliers for their ease and flexibility.

Graph 1

Getting the Right Mix

After determining the nature of the company’s products (Functional or Innovative) and the supply chains priorities (Physically Efficient or Market Responsive), managers can use the Matching Supply Chains with the Products Matrix below to determine the ideal supply chain strategy.

This matrix aids managers with determining whether the process the company uses for supplying their products is well matched or not. If mismatched, the supply chain process may be causing serious supply issues and would require an overall review.

Graph 3

Poor coordination among supply chain partners can lead to millions of dollars in waste and these types of issues can be eradicated by implementing a more suitable strategy for your product type.

Reference: Fisher, M. (1997) What is the right supply chain for your product? Harvard Business Review, Boston, MA.