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Aligning Supply Chain Essay

5788 words - 24 pages

Aligning Supply Chain
Strategies with
Product Uncertainties

Hau L. Lee

upply chain management has emerged as one of the major areas for
companies to gain a competitive edge. Managing supply chains effectively is a complex and challenging task, due to the current business
trends of expanding product variety, short product life cycle, increasing
outsourcing, globalization of businesses, and continuous advances in information technology. The Internet has contributed to both the increasing needs and
opportunities for improved supply chain management. With the Internet, companies in a supply chain can be connected in real time with information and
knowledge shared continuously, new ...view middle of the document...

Supply chain strategies that are based on a one-size-fits-all or a try-everything mentality will fail.

The Uncertainty Framework
A simple but powerful way to characterize a product when seeking to
devise the right supply chain strategy is the “uncertainty framework.” This
framework specifies the two key uncertainties faced by the product—demand
and supply. Fisher introduced the matching of supply chain strategies to the
right level of demand uncertainties of the product.1 This article expands his
framework to include supply uncertainties.
Demand uncertainty is linked to the predictability of the demand for the
product. Functional products are ones that have long product life cycles and
therefore stable demand, while innovative products are products that have short
life cycles with high innovation and fashion contents—and which, as a result,
have highly unpredictable demand.2 Fashion apparel, high-end computers, the
latest integrated circuits, and mass customized goods are examples of innovative
products, while household consumable items, basic foods, oil and gas, and basic
clothing are examples of functional products. Clearly, different supply chain
strategies are required for functional versus innovative products.
Functional products tend to have less product variety than innovative products, where variety is introduced due to the fashion-oriented nature of
the product or the rapid introduction of new product options due to
FIGURE 1. Demand Characteristics
product technology advancements.
Demand for functional products is
Functional
Innovative
much easier to forecast, while
demand for innovative products is
Low demand uncertainties
High demand uncertainties
highly unpredictable. Due to the
More predictable demand
Difficult to forecast
differences in product life cycle
Stable demand
Variable demand
and the nature of the product, funcLong product life
Short selling season
tional products tend to have lower
Low inventory cost
high inventory cost
product profit margins, but the cost
Low profit margins
High profit margins
of obsolescence is low; whereas
Low product variety
High product variety
innovative products tend to have
Higher volume per SKU
Low volumes per SKU
higher product profit margins, but
Low stockout cost
High stockout cost
the cost of obsolescence is high.
Low obsolescence
High obsolescence
Figure 1 summarizes some of the
differences between functional and
innovative products.

106

CALIFORNIA MANAGEMENT REVIEW

VOL. 44, NO. 3

SPRING 2002

Aligning Supply Chain Strategies with Product Uncertainties

FIGURE 2. Supply Characteristics
Other kinds of uncertainties
revolving around the supply side
Stable
Evolving
of the product are equally important drivers for the right supply
Less breakdowns
Vulnerable to breakdowns
chain strategy. A “stable” supply
Stable and higher yields
Variable and lower yields
process is one where the manufacLess quality problems
...

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