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The Right Supply Chain Essay

1056 words - 5 pages

The first step in devising an effective supply chain is to consider the nature of demand for your product.
For this many aspects are important: Product life cycle, demand predictability, product variety etc. But any product can be broadly classified into as either a Functional Product or an Innovative Product based on their demand patterns.
Root cause for ineffectiveness of any supply chain is the mismatch between the type of product and the type of supply chain.
Functional Products are generally staples or those generally bought from the grocery stores or retail outlets. They have stable demands are price variations do not affect the demand drastically. Such products have long life ...view middle of the document...

The physical costs include costs of production, inventory shortage and transportation while the market mediation costs arise when there is a mismatch between demand and supply. If supply > demand, the product has to be sold at a loss otherwise it results in loss of opportunities and dissatisfied customers.
The predictable demand of functional products eliminates the market mediation costs as there is almost a perfect match between demand and supply of such goods. Thus the manufacturers of such products have to concentrate on reducing the physical costs associated with such goods vis the production costs, cost of raw materials etc. They can employ a Material Resource Planning Software ( a module of SAP) that enables these companies to map their demand supply with production schedules. They have a schedule for at least the next month and try to abide by this schedule hence maximising production efficiency and reducing the inventory levels. The KPI here is the perfect flow of information between the suppliers, manufacturers and retailers which enabled these companied to meet the predictable demand at lower costs.
Although physical costs are indispensable for innovative products but market mediation costs are much more significant. The uncertain market conditions increase the risk of shortage and excesses. For innovative products it is necessary to achieve early sales to establish a market share and hence also achieve higher profit margins thus a shortage in supply of these products can prove to be very costly and is a loss of opportunity. The shorter product life cycles of such products also carries a risk of obsolescence. Hence managers should focus on Market mediation costs instead of physical costs for such products.
One should quickly react to the numbers and early signals from the market place. The critical decisions to be made about the inventory and capacity are not about minimising the costs but where to place them along the chain in order to minimise the risk of uncertain demand. The criteria for choosing the suppliers for such industries also changes. Such companies should look for suppliers who are quick to respond and flexible, of course quality cannot be overlooked but compromise on cost is affordable.
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