ARTICLE REVIEW 1

REHAN JALIAWALA ID#1293315

WHAT IS THE RIGHT SUPPLY CHAIN FOR YOUR

PRODUCT?
BY: MARSHALL L. FISHER

The article, What is the right supply chain for your product? talks about two fundamental classifications
of products based on their demands, namely functional and innovative, the importance of an appropriate
classification of the product and the associated most effective supply chain models for the two product
types. The physically efficient process of supply chain is best suited for functional products and the
market-responsive process of supply chain is more effective for innovative products. The article also
quotes and dwells on some real world examples of both companies that have mismatched their product
and the supply chain model as well as companies that have had success by using the appropriate model.

Functional products have a predictable demand. Their life cycle is normally more than 2 years. The
contribution margin* for such products is usually between 5% and 20%. The product variety is low and
there is normally an average margin of error in forecast of about 10% when production is being
committed. The lead time for a made-to-order functional product is somewhere between 6 months and 1
year.

Innovative products usually have an unpredictable demand. The contribution margin* for innovative
products varies between 20% and 60%. The product life cycle is short, about 3 months to a year.
Normally innovative products offer a large variety of products. The average margin of error in forecast at
the time of production ranges between 40% and 100%. The lead time for a made-to-order innovative
product can be between 1 day and 2 weeks.

*The contribution margin is price minus variable costs divided by price and is
expressed as a percentage.

ARTICLE REVIEW 1

REHAN JALIAWALA ID#1293315

The physically efficient process serves to fulfill predictable demands efficiently and at the lowest possible
cost. This method of managing the supply chain keeps the manufacturing focus towards high utilization,
generates high turn-over of inventory, while minimizing inventory at all levels of the chain, minimize leadtimes to the point where additional cost is not incurred, find suppliers on the basis of cost and quality and
normally design products that have a maximum performance and a minimum cost.

The market-responsive process responds quickly to changes in forecasted demands in order to minimize
stock outs, forced markdowns and obsolete inventory. This supply chain model deploys excess buffer
capacity while planning production, it ensures significant buffer stock of raw materials and finished goods
is available on hand, it aims at minimizing lead-times by heavily investing in new and advanced
technologies and suppliers are selected based on their speed, flexibility and quality. Product designs are
modular to postpone product differentiation for as long as possible.

The ideal supply chain strategy is dependent on the nature of product demand. For functional products,
the efficient supply chain is highly effective. On the other hand, for an innovative product, the responsive
supply chain is very effective. Though in essence the pairing of product and the respective ideal supply
chain model seems simple, problems arise when products shift from one category into another either
intentionally or unintentionally. A continuous assessment of product demand is essential to clearly and
correctly identify classification of product and to adopt a model for the supply chain that gives the
maximum utility for the organization.

*The contribution margin is price minus variable costs divided by price and is
expressed as a percentage.