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Homework answers / question archive / In only need the answer for question 3
In only need the answer for question 3. My only part in this question is part 3 which is (What do you think of Zhang Tianyi’s three options? What specific suggestions can you make for each of them? )
I only need the answer for that. Other quesions solved by other students.
The question start from below:
Please read the case “Baman Technology: Building Supply Chains for Boundaryless Dining” on the Blackboard and then discuss and analyze it as a group. Each group is to answer the questions below in a group report.
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S p r i n g 2 0 0 2 | V o l . 4 4 , N o . 3 | R E P R I N T S E R I E S California Management Review Aligning Supply Chain Strategies with Product Uncertainties Hau L. Lee © 2002 by The Regents of the University of California 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 products and services can be designed to fit special market segments, and new supply chain structures can be developed to serve customers in a more direct manner. S When a company faces the pressure of excessive inventory, degraded customer service, escalating costs and declining profits, or a poor return on assets, its supply chain is out of control. On the other hand, when a company moves in to new markets or new technologies, it must have its supply chain prepared for the new business challenges and opportunities. Although there are many new supply chain concepts and fads designed to exploit the advantages of the Internet, successful companies understand that the right supply chain strategy is dependent on a number of factors: ? The strategy needs to be tailored to meet specific needs of the customers. ? A product with a stable demand and a reliable source of supply should not be managed in the same way as one with a highly unpredictable demand and an unreliable source of supply. CALIFORNIA MANAGEMENT REVIEW VOL. 44, NO. 3 SPRING 2002 105 Aligning Supply Chain Strategies with Product Uncertainties ? The Internet can be a powerful tool for supporting or enabling supply chain strategies for products with different demand and supply uncertainties. 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 Potential quality problems turing process and the underlying More supply sources Limited supply sources technology are mature and the Reliable suppliers Unreliable suppliers supply base is well established. An Less process changes More process changes “evolving” supply process is where Less capacity constraint Potential capacity constrained the manufacturing process and the Easier to changeover Difficult to changeover underlying technology are still Flexible Inflexible under early development and are Dependable lead time Variable lead time rapidly changing, and as a result the supply base may be limited in both size and experience. In a stable supply process, manufacturing complexity tends to be low or manageable. Stable manufacturing processes tend to be highly automated, and long-term supply contracts are prevalent. In an evolving supply process, the manufacturing process requires a lot of finetuning and is often subject to breakdowns and uncertain yields. The supply base may not be as reliable, as the suppliers themselves are going through process innovations. Figure 2 summarizes some of the differences between stable and evolving supply processes. While functional products tend to have more mature and stable supply process, that is not always the case. For example, the annual demand for electricity and other utility products in a locality tend to be stable and predictable, but the supply of hydroelectric power, which relies on rainfall in a region, can be erratic year by year. Some food products also have very stable demand, but the supply (both quantity and quality) of the products depends on yearly weather conditions. Similarly, there are also innovative products with a stable supply process. Fashion apparel products have short selling seasons and their demand is highly unpredictable. However, the supply process is very stable, with a reliable supply base and a mature manufacturing process technology. Figure 3 gives some examples of products that have different demand and supply uncertainties. Changing the Uncertainty Landscape It is more challenging to operate a supply chain that is in the right column of Figure 3 than in the left column, and similarly it is more challenging to operate a supply chain that is in the lower row of Figure 3 than in the upper row. Before setting up a supply chain strategy, it is necessary to understand the sources of the underlying uncertainties and explore ways to reduce these uncertainties. If it is possible to move the uncertainty characteristics of the product CALIFORNIA MANAGEMENT REVIEW VOL. 44, NO. 3 SPRING 2002 107 Aligning Supply Chain Strategies with Product Uncertainties FIGURE 3. The Uncertainty Framework: Examples Supply Uncertainty Demand Uncertainty Low (Functional Products) High (Innovative Products) Low (Stable Process) Grocery, basic apparel, food, oil and gas Fashion apparel, computers, pop music High (Evolving Process) Hydro-electric power, some food produce Telecom, high-end computers, semiconductor from the right hand column to the left, or from the lower row to the upper one, then the supply chain performance will improve. Figure 4 shows the two kinds of strategies that improve supply chain performance through uncertainty reduction—demand uncertainty reduction and supply uncertainty reduction. Demand Uncertainty Reduction Strategies In many cases, although the demand of the product at the end consumer level is stable, distortion of demand signals can occur up the supply chain. As a result, the demand patterns at the upstream portion of the supply chain could become highly erratic. Hence, while the demand patterns at the end consumption level could be flat with small variations, the orders placed by the retailer to the wholesaler (or by the wholesaler to the manufacturer, or by the manufacturer to the supplier, and so on) exhibit increasing fluctuations. This is the wellknown “bullwhip effect,” which is an amplification of order variability as one goes upstream along a supply chain.3 In this way, even though the original product demand is stable, many parts of the supply chain would still be faced with highly unpredictable demand, so that overall cost efficiency cannot be achieved across the entire supply chain. Here, the observed demand uncertainty of the product would place the product in the right column of Figure 3, although it should really belong in the left column. What is needed is a way to move the demand uncertainty back to the left column. Only through information sharing and tight coordination can one regain control of supply chain efficiency. Sharing of demand information and synchronized planning across the supply chain are crucial for this purpose. Barilla, an Italian pasta manufacturer, is a case example. Pasta is a product that has both low demand and supply uncertainties. Yet, as a result of the retailers’ over- 108 CALIFORNIA MANAGEMENT REVIEW VOL. 44, NO. 3 SPRING 2002 Aligning Supply Chain Strategies with Product Uncertainties FIGURE 4. The Uncertainty Reduction Strategies Demand Uncertainty Supply Uncertainty Low (Functional Products) High (Innovative Products) Low (Stable Process) High (Evolving Process) Demand Uncertainty Reduction Strategies Supply Uncertainty Reduction Strategies reactions to demand signals, orders that are batched to make full truckloads, promotions, and order exaggerations, a high level of demand fluctuations occur, leading to significant waste and losses. Figure 5 shows the amplification of demand fluctuation of Barilla’s product from the distributor to the manufacturer. Through information sharing and coordinated replenishment programs initiated by Barilla, the supply chain efficiency was greatly improved.4 Inventory dropped by close to 50%, and stockout rates were down to almost zero as a result of the tight coordination. In the end, the bullwhip was “tamed.” Indeed, in a recent study conducted jointly by Stanford University and Accenture focused on 100 manufacturers in the food and consumer products industry, companies that reported higher than average profits were the ones who engaged in joint replenishment and planning programs with their trading partners (see Figure 6). Information sharing and collaborative replenishments up and down the supply chain are best facilitated by the use of the Internet. The grocery industry, which consists of mostly functional products with stable supply processes, is an ideal setting to implement such strategies. Currently, the Voluntary Industry Commerce Standards Committee is working on formalizing the process models and technology framework for collaborative planning, forecasting, and replenishment for the grocery industry. It seeks to have companies utilize the Internet, with electronic bulletin boards, to pursue the collaborative efforts. Nabisco and Wegmans have successfully implemented a pilot, with very encouraging results. The total snack nut category sales went up by 11% while the corresponding sales at other retailers actually declined by 9% in the test period. Nabisco’s leading brand, Planters, saw its sales rise by 40% as a result of better-planned CALIFORNIA MANAGEMENT REVIEW VOL. 44, NO. 3 SPRING 2002 109 Aligning Supply Chain Strategies with Product Uncertainties FIGURE 5. Bullwhip Effect at Barilla’s Distribution Center Sell-Through from DC Orders to Barilla 900 800 Quintals Per Week 700 600 500 400 300 200 100 0 1 6 11 16 21 26 31 366 41 46 51 Time (Week) Based on J.H. Hammond,“Barilla SpA (A-D),” Harvard Business School Case 6-694-046, 1994. promotions and discounting given to Wegmans stores, which was enabled by the collaborative efforts in replenishment. Finally, Nabisco’s warehouse fill rate increased from 93% to 97%, while inventory dropped by 18%. Several other pilots are now under way at Schnuck Markets, Kmart, Circuit City, P&G, Kimberly-Clark, Sara Lee, and Wal-Mart. Supply Uncertainty Reduction Strategies Free exchanges of information—starting with the product development stage and continuing with the mature and end-of-life phases of the product life cycle—have been found to be highly effective in reducing the risks of supplier failure. Austin and Lee have found that companies in the PC industry have engaged in extensive collaborative efforts with suppliers to help reduce the risks of suppliers not being able to ramp up fast enough in the production introduction phase as well as the risks of suppliers overproducing at the end of the product life cycle (see Figure 7).5 110 CALIFORNIA MANAGEMENT REVIEW VOL. 44, NO. 3 SPRING 2002 Aligning Supply Chain Strategies with Product Uncertainties FIGURE 6. Higher Profits and Higher Level of Joint Demand and Logistics Planning Lower Joint Programs About the Same Higher Joint Programs 100 Percentage of Respondents 90 80 70 60 50 40 30 20 10 0 Higher than Average Average Lower than Average Company Profitability Based on study of PC industry by Stanford University and Accenture, 1998. Billington et al. have also identified sharing product rollover plans with suppliers as a key means to manage the risks of product transitions.6 Indeed, the need to share and communicate important product content information to support product changes and transitions has created a software market for “product data management.” For example, Johnson and Lee described how Agile Software has been able to help manufacturers such as WebTV, Flextronics, and PairGain work tightly with their suppliers so that the risks of supply failures during product transitions could be minimized.7 Early design collaboration is another way to reduce supply uncertainties downstream. Most of the industry consortium-based market exchanges (such as Exostar, e2Open, and Covisint) have identified design collaboration with suppliers as a key service provided by the exchanges. Bose Corporation has used the “on-site” representative concept to have a supplier representative stationed at their sites to foster communication.8 The Micro-Compact Car (MCC), owned by Daimler-Benz and manufacturer of the Smart Car in Europe, set up their factory CALIFORNIA MANAGEMENT REVIEW VOL. 44, NO. 3 SPRING 2002 111 Aligning Supply Chain Strategies with Product Uncertainties FIGURE 7. Percentage of Companies Involved in Design Collaboration in PC Industry 0 Not at all 1 75% 5 Virtually all Sharing Product Spec Sharing NPI plan Sharing New Product Info Joint Product Spec Sharing Product Life Cycle Sharing Component Life Cycle Sharing Component Spec Joint NPI plan Joint Component Spec 0 1 2 3 4 Based on study of PC industry by Stanford University and Accenture, 1998. in Hambach, France, where key subsystems suppliers were given the responsibility to manage the replenishments of key modules at the factory site. Suppliers were asked to make direct investments in the Hambach factory when it was first set up in 1994 and were given space inside the factory to store their inventory. In some cases, they were also responsible for inserting their modules into the automobiles as finished products. Along with investment and increased responsibilities, suppliers are also heavily involved in the research and development of Smart Cars. This strengthened partnership relationship has paid off handsomely. Despite a difficult startup period, Smart Cars sales have recently been gaining much ground in Europe. Supplier hubs have also been used by manufacturers to reduce the supply risks of their manufacturing lines. For example, at their former manufacturing site in Fountain, Colorado, Apple Computer created a supplier hub that was operated by a third-party logistics company, Fritz Companies. Fritz would manage the replenishment and inbound logistics of the parts and materials to a warehouse (known as the supplier hub) that was in close proximity to the Apple factory. The inventory at the hub was owned by the suppliers. The use of the 112 CALIFORNIA MANAGEMENT REVIEW VOL. 44, NO. 3 SPRING 2002 Aligning Supply Chain Strategies with Product Uncertainties hub has allowed the suppliers to have much better information about Apple’s needs and consumption patterns of their parts as well as about the inventory in transit. This had resulted in more effective management of inventory replenishment and inbound logistics by the suppliers and Fritz collectively, thereby reducing the supply uncertainties for Apple.9 Supplier hubs have been used by companies such as Compaq, HP, Dell, Cisco, 3Com, and Volkswagen. Supply Chain Strategies in the Information Age Some uncertainty characteristics require supply chain strategies with initiatives and innovations that can provide a competitive edge to companies. These strategies can be classified into four types. Information technologies and the Internet have played an important role in shaping such strategies. ? Efficient Supply Chains—These are supply chains that utilize strategies aimed at creating the highest cost efficiencies in the supply chain. For such efficiencies to be achieved, non-value-added activities should be eliminated, scale economies should be pursued, optimization techniques should be deployed to get the best capacity utilization in production and distribution, and information linkages should be established to ensure the most efficient, accurate, and cost-effective transmission of information across the supply chain. The role of the Internet in this case is that it enables the supply chain to have tight and effortless information integration, as well as enabling production and distribution schedules to be optimized once the demand, inventory, and capacity information throughout the supply chain are made transparent. ? Risk-Hedging Supply Chains—These are supply chains that utilize strategies aimed at pooling and sharing resources in a supply chain so that the risks in supply disruption can also be shared. It is therefore a risk-hedging strategy. A single entity in a supply chain can be vulnerable to supply disruptions, but if there is more than one supply source or if alternative supply resources are available, then the risk of disruption would be reduced. A company may want to increase the safety stock of its key component to hedge against the risk of supply disruption, and by sharing the safety stock with other companies who also need this key component, the cost of maintaining this safety stock can be shared. Such inventory pooling strategies are quite common in retailing, where different retail stores or dealerships share inventory. Distributors such as Ingram-Micro have also provided similar pooling of inventory for their customers. The Internet plays a key role in providing information transparency among the members of the supply chain that are sharing inventory. Having real time information on inventory and demand allows the most cost-effective transshipment of goods from one site (with excess inventory) to another site (in need). CALIFORNIA MANAGEMENT REVIEW VOL. 44, NO. 3 SPRING 2002 113 Aligning Supply Chain Strategies with Product Uncertainties FIGURE 8. Matched Strategies Supply Uncertainty Demand Uncertainty Low (Functional Products) High (Innovative Products) Low (Stable Process) Efficient supply chains Responsive supply chains High (Evolving Process) Risk-hedging supply chains Agile supply chains ? Responsive Supply Chains—These are supply chains that utilize strategies aimed at being responsive and flexible to the changing and diverse needs of the customers. To be responsive, companies use build-to-order and mass customization processes as a means to meet the specific requirements of customers. The customization processes are designed to be flexible. Order accuracy (i.e., accurate specification of customer requirements) is the key to the success of mass customization. Again, the Internet has enabled very accurate and timely capturing of highly personalized requirements of customers as well as fast transfer of order information to the factory or customization centers for the final configuration of the product. ? Agile Supply Chains—These are supply chains that utilize strategies aimed at being responsive and flexible to customer needs, while the risks of supply shortages or disruptions are hedged by pooling inventory or other capacity resources. These supply chains essentially have strategies in place that combine the strengths of “hedged” and “responsive” supply chains. They are agile because they have the capability to be responsive to the changing, diverse, and unpredictable demands of customers on the front end, while minimizing the back-end risks of supply disruptions. The Right Supply Chain Strategy to Match Product Uncertainty Given the different nature of demand and supply uncertainties of different products, different supply chain strategies are needed for different products (see Figure 8). 114 CALIFORNIA MANAGEMENT REVIEW VOL. 44, NO. 3 SPRING 2002 Aligning Supply Chain Strategies with Product Uncertainties Functional Products with Stable Supply Processes When products have both low demand and supply uncertainties, the basis of competition is efficiency. There are two dimensions of efficiency—cost and information coordination. With predictable demand patterns and a stable supply process, companies should strive at improving supply chain efficiency so that the cost of providing the product to the customers is the lowest possible. This enables the company to gain a competitive advantage over competitors. Hence, these companies should aim at building “efficient supply chains.” Cost efficiency can be gained by productivity improvements, which in turn are the result of basic elements of manufacturing excellence, such as justin-time systems, automation, economies of scale, facility layout, and workflow streamlining. These are all basic tools that Japanese manufacturing companies such as Toyota have excelled in. The emphasis is on lean manufacturing to cut costs as much as possible. This is exactly how POSCO, a relatively young company in Korea, was able to become the world’s second largest steel manufacturer.10 As a functional product, the manufacturing process of steel is fairly mature and stable. POSCO focuses relentlessly on JIT techniques, total quality management, and building economies of scale at their two steel mills. The cost efficiency that POSCO was able to achieve surpasses most of the competition in the United States. Cost efficiency can also be gained by having a highly effective logistics system. For products with stable demand, it is often possible to ship products directly from the manufacturing source to the customer without going through distribution centers. Eliminating steps in the distribution channel reduces costs. For examples, retail giants such as Wal-Mart and Costco have direct-to-store distribution processes for their stable, high-volume products. Shipping products with erratic demand directly to stores, however, can result in less-than-truckload shipments with small batches, so that transportation is no longer cost-effective. Longs Drug Stores, recognizing the stable nature of most of their pharmaceutical products, has utilized a state-of-the-art scientific replenishment optimization software provided by Nonstop Solutions to plan the replenishments to their warehouses and stores. The resulting inventory savings of 40% enabled Longs to relieve enough capital to purchase 20 new stores.11 Functional Products with Evolving Supply Processes When supply processes are still evolving and therefore are faced with uncertainties regarding yield, process reliability, supply source, and lead-time, companies must find ways to prevent such uncertainties from ultimately affecting demand fulfillment. These companies should aim at establishing “risk-hedging” supply chains. Here is where inventory pools can be most effective. Such inventory stocking points decouple the supply chain so that the uncertainties of supply can be shielded. When the component with the evolving supply process CALIFORNIA MANAGEMENT REVIEW VOL. 44, NO. 3 SPRING 2002 115 Aligning Supply Chain Strategies with Product Uncertainties is of low value, then it is clearly worthwhile to stockpile the components so that the order fulfillment process will not be disrupted due to part shortages. With an evolving supply process, companies may also need to develop multiple supply bases so that backup supply sources are available. The costs of managing the multiple supply bases may be higher, but the risk of supply outages can be reduced. The Internet can serve as a means for companies to have supply and demand information and thereby enhance the efficiency of inventory pooling. The Internet can also be used to support risk-hedging supply chains. First, supply conditions can be shared quickly and accurately via the Internet, so that the downstream sites can use that information to plan accordingly. Second, the Internet enables a buyer to quickly identify alternative supply sources in the face of supply uncertainties. Third, the Internet, via market exchanges, can extend the reach of a typical buyer to suppliers from a global market. SeeCommerce, a new startup company based in Palo Alto, California, was instrumental in helping DaimlerChrysler’s service parts division improve its service performance drastically by providing total visibility of its service supply chain.12 Similarly, Instill Corporation, a major market exchange in the food service industry, helps riskhedging food operators (such as Subway) significantly improve their efficiency.13 Market exchanges (such as Covisint in the automobile industry) help to expand the supply base of manufacturers, as well as to identify availabilities of scarce components. Innovative Products with Stable Supply Processes With highly unpredictable demand, excessive inventory may result. The cost of inventory for innovative products can be significant, since the product life cycles are short. Companies with such products should pursue strategies with a “responsive” supply chain. Rather than focusing on accurate forecasting and inventory planning, companies with a very stable process and product technology can make use of the concept of postponement to pursue aggressive buildto-order strategies.14 Dell Computer is a champion in this game. As long as PC manufacturers can design their products with highly modular structures—so that the final assembly and test steps can be simply and reliably performed and suppliers of key components can provide stable supplies—then companies such as Dell, Gateway, and others can engage in build-to-order processes to be highly responsive to customer orders. These companies often utilize the concept of a supplier hub, often close to the final assembly site, to ensure a stable and reliable supply of components. The concept of postponement for innovative products is most applicable with reliable and stable supply bases. More than seven years ago, the HP PC division switched from the conventional build-to-forecast to configure-to-order (first by HP DCs, then by some channel members). They had to work on improving the modular designs to facilitate final assembly as well as on rationalizing their supply base to ensure close coordination with their suppliers for 116 CALIFORNIA MANAGEMENT REVIEW VOL. 44, NO. 3 SPRING 2002 Aligning Supply Chain Strategies with Product Uncertainties reliable and timely supplies. About the same time frame, IBM started their channel assembly business in which selective channel members can configure products using IBM’s “vanilla boxes,” matched with different subassemblies from other manufacturers. In both cases, the same two ingredients are necessary: new products are designed for ease of assembly and test, and supply integration to ensure reliable and stable supplies of components and subassemblies. The most celebrated example of a postponement strategy in the apparel industry is Benetton, in which the company redesigned their sweater manufacturing process from dye first, knit second, to knit first, then dye; thereby postponing the color destination of the product. Similarly, HP postponed their localization step for their Deskjet Printer (localizing the printer for different country needs) from the factory to distribution. The new processes may actually be more costly, but when product demand is unpredictable, pursuing a “responsive” supply chain strategy is more appropriate than a “cost-efficient” strategy. The Internet has enabled companies to tap into a bigger supply base to ensure reliable supply of the products so as to be responsive. Solectron, the unprecedented two-time winner of the National Malcolm Baldrige Award, makes use of Agile Buyer (an Internet-based procurement software provided by Agile Software) to reach multiple suppliers and obtain price and availability quotes within a day or two. This drastically reduced their cycle time to support their customers’ new product introduction process.15 Innovative Products with Evolving Supply Processes Companies with innovative products and evolving and unstable supply processes have to utilize the combination of risk-hedging and responsive strategies. The appropriate strategy here is to establish “agile” supply chains. Xilinx Inc., a fab-less semiconductor company specializing in high-end integrated circuits known as field-programmable logic, relies on such a strategy to compete successfully in the market place.16 High-end semiconductor chips are highly innovative products, often representing the first generation of the most powerful integrated circuits. Since they are pushing the frontier, the process technology used and process control methods required for the wafer fabrication process are very demanding and challenging. A highly sophisticated fabrication facility is needed. Xilinx has formed very tight partnerships with two such foundries, United Microelectronics Corporation in Taiwan and Seiko in Japan. Fabricated wafers are then stocked, forming a decoupling point known as die banks. As demand for specific chips is known through orders from customers such as Cisco, Dell, Motorola, HP, and Lucent Technologies, the final assembly and testing of the chips are carried out by other supply chain partners in Korea and the Philippines. Such a decoupling point strategy enables Xilinx to be responsive to the diverse and changing needs of their customers, who themselves are faced with highly unpredictable demand for their end products. CALIFORNIA MANAGEMENT REVIEW VOL. 44, NO. 3 SPRING 2002 117 Aligning Supply Chain Strategies with Product Uncertainties The latest innovation by Xilinx has been to create Internet-Reconfigurable-Logic (IRL). Xilinx products are field-programmable, i.e., some of the functionalities of their chips can be specified by software in the field, even after they have been delivered to the customer. In this age of rapid technological developments, some of the products in which Xilinx chips reside are going through constant product generation changes that would require the updating of the functionalities of the Xilinx chips. With IRL, the field-programming logic can be modified or updated after the installation at the end user’s premises over networks and the Internet. These online field upgradable systems can range from multi-use set-top boxes and wireless telephone cellular base stations to communications satellites and network management systems. Since 1999, Xilinx has surpassed its competitors and is now the market leader for field-programmable logic. Adaptec, another fab-less semiconductor company faced with both evolving supply processes and innovative products, also relied on advanced Internetbased solutions to exchange information and coordinate their production plans with their supply chain partners. Using software called Alliance developed by Extricity, the company communicates in real time with their foundry (Taiwan Semiconductor Manufacturing Company) and their assembly partners (Amkor, ASAT, and Seiko) with information such as detailed and complex design drawings, prototype plans, test results, and production and shipment schedules. This greatly facilitates their ability to be aware of demand and supply levels, and they can respond quickly to potential mismatch problems. It also helps to shorten their new product development times. With the use of Alliance, Adaptec’s cycle time was cut by more than 50%.17 Realizing the tremendous uncertainties that it faces in both supply and demand, Cisco has embarked on a very ambitious project to create an e-Hub.18 The e-Hub will link multiple tiers of suppliers via the Internet, and it will coordinate supply and demand planning across the supply chain, using intelligent planning software provided by Manugistics. The e-Hub will also enable the identification of potential supply and demand problems early, with proper warning given to the appropriate parties and resolution actions taken promptly via the Internet. Market exchanges in the high-tech sector, such as Converge and e2open, have to deal with the market uncertainties in both supply and demand. These exchanges have aimed at creating agile supply chains for their member companies. Conclusion Demand and supply uncertainties can be used as a framework to devise the right supply chain strategy. Innovative products with unpredictable demand and an evolving supply process face a major challenge. Because of shorter and shorter product life cycles, the pressure for dynamically adjusting and adapting 118 CALIFORNIA MANAGEMENT REVIEW VOL. 44, NO. 3 SPRING 2002 Aligning Supply Chain Strategies with Product Uncertainties a company’s supply chain strategy is mounting. Using the Internet to develop agile supply chains with information sharing, coordination, and postponement has enabled companies such as Xilinx and Adaptec to compete successfully in their market places. The challenges are great, but so are the opportunities. Notes 1. M. Fisher, “What Is the Right Supply Chain for Your Product” Harvard Business Review, 75/2(March/April 1997): 105-116. 2. Ibid. 3. See H.L. Lee, V. Padmanabhan, and S. Whang, “The Bullwhip Effect in Supply Chains,” Sloan Management Review, 38/3 (Spring 1997): 93-102. 4. See J.H. Hammond, “Barilla SpA (A-D),” Harvard Business School Case 6-694-046, 1994. 5. T.A. Austin and H.L. Lee, “Unlocking the Supply Chain’s Hidden Value: A Lesson from the Personal Computer Industry,” Supply Chain Management Review, 2/2 (Summer 1998): 24-34. 6. C. Billington, H.L. Lee, C.S. Tang, “Product Rollover: Process, Strategies and Opportunities,” Sloan Management Review, 39/3 (Spring 1998): 23-30. 7. E. Johnson and H. Lee, “Agile Software—I Want My WebTV,” Stanford Global Supply Chain Management Forum Case, SGSCMF-001-2000, January 3, 2000. 8. B. Isaacson, “Bose Corporation: The JIT II Program (A),” Harvard Business School Case 9-694-001, 1994. 9. See L.R. Kopczak, “Apple Computer’s Supplier Hubs: A Tale of Three Cities,” Stanford University Case, 1996. 10. H.L. Lee and S. Whang, “Steelmaking at POSCO,” Stanford Global Supply Chain Management Forum Case, 1997. 11. See H.L. Lee and S. Whang, “Demand Chain Excellence: A Tale of Two Retailers,” Supply Chain Management Review, 5/3 (March/April 2001): 40-46. 12. P. Rajwat, “SeeCommerce: Enhancing Supply Chain Velocity at DaimlerChrysler,” Stanford Global Supply Chain Management Forum Case, SGSCMF-001-2001, 2001. 13. E. Chen et al., “Instill Corporation: Improving the Foodservice Industry Supply Chain,” Stanford Global Supply Chain Management Forum Case, SGSCMF004-2000, 2000. 14. See E. Feitzinger and H.L. Lee, “Mass Customization at Hewlett-Packard: The Power of Postponement,” Harvard Business Review, 75/1 (January/February 1997): 116-121. 15. See S. Fox et al., “Digital Market, Inc.” Stanford Global Supply Chain Management Forum Case, SGSCMF-005-1999, April 20, 1999. 16. A. Brown, H.L. Lee, R. Petrakian, “Xilinx Improves Its Semiconductor Supply Chain Using Product and Process Postponement,” Interfaces, 30/4 (July/August 2000): 65-80. 17. See B. Peleg, “Adaptec Inc., Cross-Enterprise Integration,” Stanford Global Supply Chain Management Forum Case, SGSCMF-002-1999, Feb 13, 1999. 18. F. Grosvenor and T.A. Austin, “Cisco’s eHub Initiative,” Supply Chain Management Review, 5/4 (July/August 2001): 28-35. CALIFORNIA MANAGEMENT REVIEW VOL. 44, NO. 3 SPRING 2002 119 California Management Review University of California ? F501 Haas School of Business #1900 ? Berkeley, CA 94720-1900 (510) 642-7159 ? fax: (510) 642-1318 ? e-mail: cmr@haas.berkeley.edu ? web site: www.haas.berkeley.edu/cmr/ For the exclusive use of A. KAYAL, 2021. CB0065 REV: September 20, 2020 XIANDE ZHAO LIYANG RUAN LIANG WANG Baman Technology: Building Supply Chains for “Boundaryless Dining” In November 2019, Zhang Tianyi, CEO of rice noodle chain Beijing Baman Technology Co., Ltd. (“Baman”), announced expansion plans. Founded in 2014, Baman ran more than 60 restaurants in China’s northern Beijing-Tianjin region, with an average daily turnover of more than ¥10,000 (US$1,446) ? each. The company’s retail business was also growing steadily. Baman ? started out building brand reputation and popularity using online community marketing. In its first year, the company opened five restaurants and then rolled out its hallmark “boundaryless dining” model over two years. By adding takeaway and retail products to its range, Baman went beyond the confines of traditional restaurants to form a diversified and complementary revenue matrix. However, by 2017, Baman was weighed down by excessive inventory, forcing Zhang to examine the importance of supply chain management. The company began integrating supply chain management with business strategy the following year. The measures included clarifying supply chain positioning, segmenting its management for restaurant and retail needs, and ensuring collaborative innovation with partners to lower costs and generate greater efficiency. Baman’s enhanced supply-chain management capabilities set it apart from many other restaurant brands that had become popular online. They made it more sustainable in an industry where names generally only lasted two or three years. The next challenge for Baman was to manage more complex supply chains as its businesses and markets expanded. Background After earning a master’s degree from Peking University in 2014, Zhang turned down conventional job offers and founded Baman with ¥150,000 raised between him and some friends to sell Hunan beef ? ¥ = CNY = Chinese yuan renminbi; ¥1 = approximately US$0.144672 on August 25, 2020. Originally known as “Funiutang”, later renamed to “Baman” in April 2018, a name from the Hunan dialect which literally means never give up. ? Professor Xiande Zhao, Case Writer Liyang Ruan and Research Fellow Liang Wang of China Europe International Business School prepared this case. It was reviewed and approved before publication by a company designate. Funding for the development of this case was provided by China Europe International Business School and not by the company. CEIBS cases are developed solely as the basis for class discussion. Cases are not intended to serve as endorsements, sources of primary data, or illustrations of effective or ineffective management. Copyright © 2020 China Europe International Business School. To order copies or request permission to reproduce materials, call 1-800-545-7685, write Harvard Business School Publishing, Boston, MA 02163, or go to www.hbsp.harvard.edu. This publication may not be digitized, photocopied, or otherwise reproduced, posted, or transmitted, without the permission of Harvard Business School. This document is authorized for use only by AYMEN KAYAL in 2021. For the exclusive use of A. KAYAL, 2021. Baman Technology: Building Supply Chains for “Boundaryless Dining” CB0065 rice noodles. As a native of Changde, Hunan province, Zhang was a connoisseur of beef rice noodles. He felt that while standardized preparation of many Chinese dishes was not possible, beef rice noodles were an exception. Although the beef needed hours of preparation and stewing to produce broth, beef rice noodles could be made to order within 30 seconds through a standard process of boiling rice noodles and adding broth and toppings. Zhang simplified the process to a set of steps and pre-prepared ingredients to produce high-quality beef rice noodles in record time. Baman quantified traditional beef broth recipes that depended greatly on a chef’s experience into a carefully proportioned spice mix of 24 ingredients. The company also defined rigorous cooking standards. The beef, including tendon and bone, required at least five hours of stewing to make the broth. Additionally, only a certain kind of long-grain non-glutinous rice containing at least 25% amylose was suitable for the rice noodles. The company also dictated that the broth had to reach a Scoville Heat Unit (SHU) ? of at least 399. This structured approach meant that Baman could serve up beef rice noodles fast and easily with a consistent taste and quality. Baman could not afford to open outlets in prime locations with high footfall initially and so instead leveraged online traffic to build a following. By marketing products via China’s Twitter-like microblogging platform Weibo and instant messaging super-app WeChat, Baman gained followers among Hunan communities studying and working in Beijing. The initiative snowballed into a 2,000-member-strong online fan club. Word of mouth from this group boosted the brand’s visibility, earning the company millions of fans and even media coverage from state broadcaster CCTV and the BBC. Baman invested significant time into fan base interactions online and offline. It invited the most loyal customers to try newly developed or redesigned dishes to collect valuable feedback and suggestions. Baman’s efforts bore fruit, and the firm soon began to turn a profit allowing the opening of four more outlets in the first year of operations. “Boundaryless Dining” Zhang was aware that Baman’s fledgling strategy to strike up a customer base for its physical restaurants through online marketing was incapable of underpinning long-term growth. Other players that adopted a similar strategy had struggled to scale-up their businesses. To avoid the same predicament, Zhang removed limitations on the restaurant experience. The firm aimed to cut dependency on actual footfall, which was prone to fluctuations while offering customers the freedom to enjoy beef rice noodles anytime and anywhere. To this end, Baman launched what it called “boundaryless dining” in 2015, breaking with the constraints of traditional restaurants in terms of limited opening times and seating. The strategy began with the addition of a take-out service, offering customers the opportunity to eat noodles at their office or home, so long as their location was within a certain radius of a Baman eatery. Rice noodles lose their taste when soaked in broth for too long, so the company redesigned takeaway packaging to separate broth and noodles during transit and preserve the taste for about one hour after dispatch. The takeaway dishes were essentially an extension of its fresh food business. Therefore, to push the boundaries of time and space even further, Zhang set his sights on retail. He wanted to package his ingredients so that they had a long shelf-life, thereby making his dishes available anytime and anywhere. Baman had laid a foundation for standardized production and, in 2016, developed pre-packaged food that would stay fresh for up to 120 days. Dried rice noodles, ? The Scoville Heat Unit is a measurement of the pungency (spiciness) of peppers and other hot foods. The scale is based on the concentration of capsaicin, an active component of chili peppers that produces a burning sensation when it touches your tongue or skin. A beef rice noodle with SHU lower than 399 will make Hunan people feel the dish is “unauthentic”. 2 This document is authorized for use only by AYMEN KAYAL in 2021. For the exclusive use of A. KAYAL, 2021. Baman Technology: Building Supply Chains for “Boundaryless Dining” CB0065 sealed broth, cubed beef and side dishes were processed in-factory, packaged in cardboard boxes and distributed to retailers across China. This product provided the convenience of storage and cooking. It took consumers only eight to ten minutes to make a bowl of beef rice noodles at home with nearly the same taste as a dine-in order. Baman sold the pre-packaged noodle dishes for about ¥20 per box, slightly cheaper than the price of a bowl in-store. Members of its online fan community were the first consumers and promoters of the pre-packaged foods. By guiding community traffic to its flagship store on Alibaba’s premium e-commerce platform Tmall, Baman increased monthly sales from zero to ¥1 million in about two months ?. The move expanded Baman’s presence beyond Beijing and Tianjin to the whole country. The enterprise also diversified sales channels to cover not only online marketplaces like Tmall and JD.com but also more than 3,000 offline supermarkets, including upmarket Ole, Alibaba’s Freshippo, JD’s 7Fresh, Metro and Carrefour. This portfolio of dine-in, takeaway and pre-packaged products brought Baman diverse revenue streams. By 2017, Baman had opened 13 restaurants, contributing nearly one-third of total income. Takeaway and retail accounted for another 30% and 40%, respectively. At the same time, Baman began cross-marketing campaigns. For example, a typical store would reserve a display space for pre-packaged products available for purchase. Restaurant staff would also recommend internet channels for pre-packaged goods, driving the conversion of offline traffic to online sales. Baman also offered diners a WeChat mini-program for in-seat ordering (with a 90% uptake), which collected user and transaction data for marketing uses. Zhang believed that cross-selling would boost online and offline growth for both restaurants and retail. Excess Inventory Baman accelerated the expansion of retail products in the second half of 2017. Zhang maintained that customers who loved Hunan beef rice noodles would also want to buy other typical snacks from the province. Baman arrived at this conclusion after successful trials offering local favorites like stinky tofu and sweet dumplings as side dishes. He also noted that a large retail market already existed for products like stinky tofu, which racked up more than ¥300 million in annual sales on Taobao alone. Zhang also observed that the Hunan snack market was highly decentralized without a clear leading brand. Baman had already built a solid reputation. The company name comes from Hunan dialect, which adds to the brand’s authenticity and credibility. Zhang and his team identified several categories of snacks that had posted yearly sales in excess of ¥100 million on Taobao, and that were not distributed by any major retailer. Baman engaged several manufacturers to make products under its brand and added nearly 40 SKUs (stock-keeping units) to its retail product line in just a few months. Zhang expected each SKU to generate ¥10 million in annual sales, bringing in around ¥400 million in total, up from ¥150 million in 2017. However, Baman was soon saddled with huge excessive inventory for the first time since its inception. Zhang was at a loss; he previously operated between 30 and 40 SKUs for the restaurant business without encountering any serious overstocking issues. Baman had assumed that the retail business, with its bigger market, would pose no problem. In contrast, the same SKU expansion led to surplus stocks with inventory turnover on some items exceeding 60 days. Slow-moving stock soaked up vast amounts of capital, compounding Zhang’s problems. “From late 2017, the first thing I would do as soon as I got up every morning was check our cash flow and stock level,” he said. “They had ? As of Aug 2020, Baman’s monthly sales on Tmall (including flagship store, Tmall supermarkets and third-party distributors) have reached ¥15 million. 3 This document is authorized for use only by AYMEN KAYAL in 2021. For the exclusive use of A. KAYAL, 2021. Baman Technology: Building Supply Chains for “Boundaryless Dining” CB0065 never been a concern before, but the retail business turned out to be a completely different ball game.” Unsold inventories mushroomed to nearly ¥20 million at the end of that year. Supply Chain Reflections Zhang never envisaged that supply chain issues could hinder Baman as there was an abundance of dedicated suppliers available in the food industry. His experience provided invaluable insights into such management: “The importance of supply chains was not obvious when the business was small,” he said. “However, as the company grew in magnitude, so did the importance of good supply chain efficiency for survival… effective supply chain management turned out to be far more complex than just outsourcing.” In late 2017, Zhang reexamined supply chain management at Baman from a strategic perspective. In his view, the company’s comparative advantages in the catering and food industry lay at each end of a “smiling curve,” i.e., product R&D, branding and customer relationship management. Therefore, Zhang aimed to strategically position Baman as a brand owner and virtual manufacturer in the supply chain. “Our role in the catering and food supply chain is similar to that of Apple in the smartphone supply chain, i.e., to provide customers with quality products and services, and to attract more orders for upstream and downstream partners, while leaving the procurement, production, distribution and logistics jobs to more specialized suppliers,” he said. Zhang also found that what applied to the restaurant supply chain did not necessarily apply to that of retail. The two required different management approaches. In the long term, Baman needed to strengthen supply chain relationship management and reinforce mutually beneficial cooperation with upstream and downstream partners, instead of treating them only as providers. “Improvement of supply chain efficiency and reduction of relevant costs will bring mutual benefits and win-win results, so they require concerted efforts from both upstream and downstream partners,” he said. Supply Chain Segmentation Retail Supply Chain: Reducing SKUs to Boost Efficiency In 2018, Baman reduced the number of its retail SKUs from nearly 40 to less than ten to eliminate excess inventory and free up working capital. The company also cut some SKUs that generated sales but at the cost of high capital occupation, as they required high minimum order levels (e.g., a minimum order of 30,000 units was required for the stinky tofu SKU). Only the most in-demand SKUs were retained. Larger bulk orders led to economies of scale through discounts and allowed Baman to forge better links with suppliers (e.g., shorter lead time). At the same time, the best-selling SKUs effectively ended up with faster sales cycles, improved inventory turnover and less overstocking. The firm also avoided frequent retail SKU updates because, unlike dine-in offerings, changing retail SKUs could mean the replacement of raw materials and production barcodes, which would be complex and lead to material waste (eventually become operating costs). In Zhang’s view, the supply chain strategy of minimizing complexity and increasing efficiency was a perfect match for Baman’s retail business at this stage. For a small-sized brand owner with lesser bargaining power over food suppliers, cost efficiency on the supply side came before profitability. It would be better to use supply chain metrics than market indicators to decide whether an SKU was profitable, to avoid high book profits but low working capital. He hoped that Baman could create more sustainable ‘Super SKUs’ like “Kangshifu Braised Beef Flavor Instant Noodles” or 4 This document is authorized for use only by AYMEN KAYAL in 2021. For the exclusive use of A. KAYAL, 2021. Baman Technology: Building Supply Chains for “Boundaryless Dining” CB0065 “Unif Beef with Sauerkraut Flavor Instant Noodles,” that drove repeat purchases, and used a highly efficient and stable supply. Restaurant Supply Chains: Increasing SKUs to Hedge Risk Zhang adopted a completely different supply chain strategy for the restaurant business in which the company had more experience. Baman restaurants generally offered up to 30 products, 30% of which were subject to annual adjustments. The firm replaced poor-performers with new ones or innovated slightly on flagship products, such as creating new selling points with ingredients popular online. He believed that today’s restaurant industry could not replicate the success of centuries-old best-sellers like Peking duck. Restaurants needed to update their offerings from time to time, drawing inspiration from fast fashion to retain customer attention. More importantly, Baman’s restaurant business suppliers considered the company a key account, providing the company with greater bargaining power (in comparison, the firm held less clout in the larger retail chain and was afforded less flexibility). Greater supply chain flexibility for the eateries allowed Baman to place lower-volume orders from time to time and get faster responses from suppliers. To reduce the cost of maintaining relationships with multiple suppliers, Baman forged closer ties with a few key players. The firm offered them more orders (at a lower procurement cost), engaged them in more supply chain processes and built up positive links that allowed more flexible coordination. With a clear distinction between retail and restaurant supply chains, Baman defined respective objectives and key performance indicators for the two business lines. This approach provided a roadmap for supply chain deployment, as well as collaboration with upstream and downstream resources. In this way, Baman resolved supply chain problems that stemmed from treating the restaurant and retail businesses in the same way, and gradually refined the management of its dual-segment supply chains. Upstream Collaboration and Innovation Supplier Selection Baman’s upstream suppliers were mainly involved in the procurement and production processes. Food safety was of utmost importance in the food industry, and any failure could severely impact brand reputation. Baman prioritized three factors when selecting and evaluating suppliers for its restaurant and retail businesses, namely, quality, flexibility and price. For example, if the average industry defect rate was six items per 10,000, and while supplier A and supplier B had rates of five and one per 10,000, respectively, Baman would select Supplier B, even if Suppler A expressed greater interest in cooperation and offered better pricing. Zhang would go the extra mile to make relationships with demanding suppliers work if he knew their reliability could add value to the brand. To hedge specific risks in the restaurant supply chain, Baman classified suppliers A, B and C. ? By working with a reasonable number of A, B and C-class suppliers, Baman hoped to boost flexibility and efficiency along the supply chain. He attached the greatest importance to quality when selecting B and C-class suppliers. The firm adjusted the distribution of orders among the three types of suppliers periodically according to performance. For example, Baman conducted weekly evaluations ? A-class= primary supplier, B-class= secondary supplier?C-class = backup supplier 5 This document is authorized for use only by AYMEN KAYAL in 2021. For the exclusive use of A. KAYAL, 2021. Baman Technology: Building Supply Chains for “Boundaryless Dining” CB0065 on restaurant food suppliers based on product quality (60%), service quality (25%), process improvements (5%), compliance and anti-corruption safeguards (5%) and R&D innovations (5%). Baman split the all-important product quality indicator into several sub-categories (see Exhibit 1), two-thirds of which related to customer feedback. The company shared these indicators with suppliers to show that customers, not Baman, had the final say on supplier performance. Collaborative Innovation with Key Suppliers Baman generally gave the majority of orders to key suppliers as long as they delivered on performance. This approach reinforced Baman as an essential partner and strengthened relationships with these suppliers. A-class catering industry suppliers usually provided an array of value-added services, including procurement, warehousing and deliveries, in addition to central kitchen production. Baman used all these additional services even though it was not the most cost-effective approach. Zhang explained it was better to outsource these functions to one key player than to multiple suppliers to guarantee better service quality, fewer coordination costs, and sustain good cooperation by ensuring their healthy profit margins. One of Baman’s topping manufacturers serves as an example of this principle: the company in question had a solid industry reputation. It supplied to several well-known chains in the Beijing-Tianjin region. The manufacturer provided a variety of toppings for Baman stores and also served other supply chain processes. It procured ingredients on behalf of Baman, stored and distributed them. It also centrally warehoused and delivered other Baman inputs like rice noodles, snacks and drinks (see Exhibit 2). Baman would also seek out constructive input from key suppliers for product R&D. For example, the firm once planned a fish topping in response to customer demand. However, key suppliers said that the fragile nature of fish flesh posed a technical challenge during processing and led to higher wastage and costs, as well as unguaranteed quality. Baman ultimately abandoned this plan. Another example related to beef offal topping. The supplier had more experience than Baman in mixing offal ingredients to produce toppings at a reasonable cost. In exchange for the advice, Zhang was willing to reduce the company’s own margin and give more to the supplier. Zhang personally met the heads of each key supplier and visited their facilities as he was a firm believer that treating key suppliers as “in-house players” would help nurture solid relationships. As a top graduate from Peking University, Zhang was able to rapidly learn about the industry through his supplier interactions before applying this knowledge to develop ties with small and medium-sized suppliers. Growing Together with Smaller Players Baman also worked with small and medium-sized suppliers, most of which it partnered during its fledgling stage. Although these suppliers provided quality goods, they failed to boost production capacity to keep pace with Baman’s expansion. The company decided to help those small and medium-sized suppliers that were keen to work with the firm and willing to adjust capabilities that benefited their relationship. For example, Baman assisted a wide rice noodle producer that was using outdated production approaches. Zhang shared with the company lessons that he had learned or had picked up from other key suppliers and recommended a consulting firm to help them improve production. The recommendations covered new equipment purchases, production process reengineering and visualization, operational process optimization and personnel training. Baman also covered part of 6 This document is authorized for use only by AYMEN KAYAL in 2021. For the exclusive use of A. KAYAL, 2021. Baman Technology: Building Supply Chains for “Boundaryless Dining” CB0065 the equipment upgrade costs by refunding part of the order amount. In return, the supplier offered not only a dedicated modern production line for Baman, but it also linked its production scheduling to the company’s store management information system, which collected daily orders from more than 60 eateries, cutting communication costs. The supplier also provided Baman with favorable prices 1.5-2 times cheaper than those offered to other firms. Zhang said it was not a zero-sum game in which the supplier made concessions to Baman, but a win-win game for the growth of both parties. “It wasn’t profitable and even lost money at the beginning,” he said. “However, as production capacity expanded, it grew into a leading wide rice noodles manufacturer in the Beijing-Tianjin region, with larger business volume and higher selling prices.” Supply Chain Synergies Baman tactically sought out synergies between its newly segmented restaurant and retail supply chains and engaged capable manufacturers to supply both in-store and pre-packaged foods. Zhang believed that the processing approaches for foods in restaurants and retail were reasonably similar. Beef toppings, for example, were first stewed in a central kitchen. Baman could freeze the beef and deliver to restaurants via cold chain, or sterilize it at a high temperature before pre-packaging for retail. The processes were more or less the same, except for the final step. In theory, beef stewing could serve as a decoupling point in the supply chain: part of the beef could be sterilized at a high temperature based on actual demand, with the rest frozen and delivered to outlets. It was also theoretically feasible for one rice noodle supplier to fulfill restaurant and retail orders as production for each channel only differed in the final step (dehydration for retail). Few suppliers of premium topping ingredients, except for one beef offal supplier, were willing to try this synergized method. Restaurant supply chains were particularly reluctant to serve retail, even if it meant more business from Baman. Zhang attributed their reluctance to path dependence: “the suppliers believe their strengths lie in the catering market, and to serve retail would mean entering a completely new food processing field. In fact, all they need to do is add one more step to their production line, more specifically, purchase and deploy high-temperature sterilization equipment,” he said. Suppliers willing to try something new also failed to deliver the desired results. “One supplier tried to produce retail products at a slower speed than I expected.” Nevertheless, Zhang was determined to pursue this strategy. By involving more suppliers capable of serving restaurant and retail supply chains at the same time, Baman could further reduce costs, increase efficiency and improve supply chain flexibility to hedge risks as business expanded. Downstream Delivery Optimization Optimizing the downstream delivery network posed a new challenge to Baman. There were no downstream partners to manage the restaurant supply chain since the company was the end-consumer in the chain. However, after entering retail, Baman became a supplier of pre-packaged products for e-commerce platforms like Taobao and JD.com, as well as traditional offline players like Hualian Group and Carrefour. As a newcomer, Baman ran into some problems due to a lack of experience in the sector. In e-commerce, Baman opened flagship stores on Tmall and JD.com, both of which punish sellers for failing to dispatch items within 48 hours of receiving orders. It generally took four to five days for Baman’s pre-packaged products to arrive at the e-commerce warehouse due to a poor location choice. Online sales were often tricky to forecast. Baman had no choice but to hoard as many goods as possible in the e-commerce warehouse to avoid platform punishments. This situation contributed to the company’s excessive inventory level in late 2017. 7 This document is authorized for use only by AYMEN KAYAL in 2021. For the exclusive use of A. KAYAL, 2021. Baman Technology: Building Supply Chains for “Boundaryless Dining” CB0065 Delivery Network Optimization Baman optimized a packaging and delivery network for its retail product line to resolve issues. Zhang found that there were two critical nodes in the retail chain. One was the packaging facility that combined toppings, rice noodles and packaging from different producers to make the finished products. The other was the e-commerce warehouse, which ensured the deliveries nationwide (see Exhibit 3). Connectivity between these two nodes was of utmost importance and determined the cost and timeliness of the entire downstream network. Baman respectively relocated the packaging facility and e-commerce warehouse to Huaihua and Changsha, both in Hunan province. The Huaihua plant allowed Baman access to premium topping suppliers at a lower cost while the Changsha warehouse brought convenient transportation. The close vicinity of the two made overnight deliveries possible. If the warehouse was out of stock, then Baman could “package-to-order” as long as the finished goods could arrive at the e-commerce warehouse the next day. As a result, Baman was able to eliminate most safety stock. Baman adopted the same supply chain strategy, positioning and tactics used in upstream operations for the downstream stages. The company remained focused on branding and customer relationship management in which it excelled while outsourcing other functions to partners. Quality, flexibility and price remained the key criteria for selecting downstream partners. Baman also pushed for consolidation by having the same e-commerce warehousing partner undertake as many logistic jobs as possible. E-commerce Collaboration Baman marketed products directly to consumers via flagship stores on Tmall and JD.com. As it gained in popularity, the firm entered the 2B (to-business) market, serving self-operated storefronts on the Tmall Supermarket section and JD.com by directly shipping to their warehouses. Baman positioned itself as a humble “learner” when collaborating with leading online selling sites. “These big platforms are role models for us to learn, we respond supportively to their purchasing and replenishment needs,” Zhang said. “They offer information system interface, specialized software and even application programming interface (API) to suppliers like us to facilitate our collaborations. Communication between us is smooth…We can benefit a lot from the market and demand information they share with us.” Zhang felt that e-commerce majors were strongly motivated to integrate with suppliers, which perfectly suited Baman’s supply chain strategy. As collaboration deepened, synergies emerged. “These big platforms sometimes use our products in production for pre-sales, and sometimes guide us to conduct cross-docking with them (i.e., ship our products from our assembly plant directly to their front warehouses, skipping our own e-commerce warehouse stage)… These help both of us to improve supply chain efficiency.” However, collaboration was limited to information sharing for the most part. Looking Forward Further Synergies between Supply Chains Zhang reflected that Baman had made great strides in supply chain management over the last two years but conceded the firm “still had a long way to go. As our restaurant and retail businesses continue to grow, more supply chain challenges are ahead.” One pressing question was how to convince more suppliers to serve both restaurant and retail supply chains, which would boost 8 This document is authorized for use only by AYMEN KAYAL in 2021. For the exclusive use of A. KAYAL, 2021. Baman Technology: Building Supply Chains for “Boundaryless Dining” CB0065 Baman’s flexibility. The company could not resolve this by simply adding equipment, Zhang said, adding that the issue required a change in mindset. He had to find a better way to boost supplier collaboration. Should he hold thorough discussions with suppliers, expounding the benefits on offer? What kind of cooperation mechanism should Baman pursue? Technical improvements were also necessary, and Zhang considered adopting an integrated ERP system for catering and retail suppliers to help count their input and benefits when serving both businesses simultaneously. Market Expansion Another lingering question was how to open more outlets and conquer more regional markets. Baman had emerged from running more than 60 outlets with a standardized and replicable operating model for restaurants covering aspects such as staffing, division of labor, standard operating procedures (SOPs), and supervision. The company broke down the actions of each store visitor into 375 sequences to standardize management of each engagement point. Baman set up an enterprise university and training programs to build a talent pipeline to aid expansion. Newly recruited college graduates could generally become restaurant managers after six months of training. Baman’s outlet design drew inspiration from “Chu culture” ? by incorporating typical elements such as Chu Ci (The Verses of Chu), the phoenix and the hanging chair, making the restaurants popular selfie spots. However, Baman stores were only present in the Beijing-Tianjin region. Zhang had communicated with investors when raising early funding that Baman would not expand beyond Beijing unless it opened at least 50 outlets there and achieved economies of scale. Blindly opening stores in Beijing, Shanghai, Guangzhou, Shenzhen and other major cities at home and abroad could only result in low supply chain efficiency. Now that Baman had reached 60 outlets in its stronghold, was it time to foray into other regional markets? Zhang put plans to expand to Shanghai on ice in 2018, partially due to supply chain concerns. The service scope of its restaurant food suppliers was confined to the regional market. Therefore, Baman would need to engage new suppliers to establish a presence in Shanghai, which would probably bring new management problems. He decided to rethink his approach and start by formulating an executable plan based on Baman’s established strategy, addressing issues such as customer acquisition and supply chain support. For the moment, Zhang planned to open 100 outlets in the Beijing-Tianjin region (including one store per two square-kilometers within the capital’s fourth ring road). This way, Baman could become part of ‘Beijing’s infrastructure.’ Single-outlet traffic would remain unchanged as outlet density grew while there would be cost reductions and supply chain efficiency improvements. Running 100 outlets would help Baman fully tap into its restaurant supply chain capacity. However, product development and update issues would arise. How should Baman attract new customers to its new outlets with better offerings, without encroaching on the traffic of pre-existing outlets? While eager to open more outlets, a franchise system was not on Baman’s agenda because its outlets had played a key role in driving retail sales, and the management of franchised outlets could pose new challenges or even “endanger our brand’s reputation.” Self-operated Supply Nodes When considering expansion, Zhang also pondered over whether Baman should build self-operated key nodes in the supply chain to better support its future nationwide supply and ? Chu was a major country in ancient China during the Spring, Autumn and Warring States Period (770 B.C.-221 B.C.). Chu culture is regarded as a symbol of Hunan in China today. 9 This document is authorized for use only by AYMEN KAYAL in 2021. For the exclusive use of A. KAYAL, 2021. Baman Technology: Building Supply Chains for “Boundaryless Dining” CB0065 delivery. Guided by its “owning two ends, and coordinating middle processes with partners” supply strategy, Baman had reimagined the entire cycle of supply chain operations from supply to delivery by driving collaborative innovations with suppliers and adjusting the network layout. However, Baman’s restaurant supply chain remained regional while the retail one was yet to reach maturity. Would such an “asset-light” supply chain be resilient enough to deal with a future spike in outlets and retail SKUs? Zhang had gained considerable knowledge of food factory construction and operations by working with key suppliers on collaborative innovations and with small and medium-sized suppliers on mutual growth. Various local governments were also willing to provide factory sites, so should Zhang leverage these internal and external resources to “add some weight” to Baman’s supply chains? The potential existed to build a self-operated food factory, packaging facility or a central warehouse, like those of Alibaba’s Freshippo. By building its own factory or warehouse, Baman would be able to increase control over supply chains, minimize supply disruption and improve its efficiency as well. The facility would bring greater cost advantages and returns on investment once at full capacity. At the same time, however, Baman would have to be more involved in some intermediate supply chain processes, which would bring new challenges such as new business processes and personnel management as well as increased fixed asset investment. Facing these questions concerning Baman’s short-term and long-term development, what should Zhang do to ensure the company’s supply chains grow in line with its scale-up plans? 10 This document is authorized for use only by AYMEN KAYAL in 2021. For the exclusive use of A. KAYAL, 2021. Baman Technology: Building Supply Chains for “Boundaryless Dining” CB0065 Exhibit 1: Examples of Baman’s Supplier Performance Evaluation Indicators a) Overall Supplier Rating Goods Service Process Compliance Innovation Total Change from Quarterly Score Quality Level Improvement (5) in R&D (5) Score Previous Week (Cumulative) (60) (25) (5) A King 60 25 4 5 0 94 – 269 B Gold 59 25 0 5 2 91 3 257 C Sliver 56 25 0 5 0 86 3 237 D Bronze 48 25 0 5 0 78 -3 247 b) Sub-indicators in Goods Quality Goods Quality (60) Supplier No. of Converted No. of complaints Converted No. of Converted Major Converted complaints (on score (on foreign score complaints score accident score deterioration) matter) (others) A 0 15 0 15 0 10 0 20 B 0 15 0 15 1 9 0 20 C 0 15 0 15 4 6 0 20 D 2 5 0 15 2 8 0 20 A total of 15 points; 5 points A total of 15 points; 5 points A total of 10 points; 1 point 20 points for no major deducted for each complaint deducted for each complaint deducted for each complaint accidents; and zero for regarding the deterioration of regarding foreign matter regarding food ingredients any major accidents food ingredients found in in food ingredients Note: The data are subject to concealment treatment, and only part of the suppliers are selected. Source: Baman’s internal statistics 11 This document is authorized for use only by AYMEN KAYAL in 2021. For the exclusive use of A. KAYAL, 2021. Baman Technology: Building Supply Chains for “Boundaryless Dining” CB0065 Exhibit 2: A Demonstration of Baman’s Restaurant Supply Chain Source: Summarized by the case author 12 This document is authorized for use only by AYMEN KAYAL in 2021. For the exclusive use of A. KAYAL, 2021. Baman Technology: Building Supply Chains for “Boundaryless Dining” CB0065 Exhibit 3: A Demonstration of Baman’s Retail Supply Chain Source: Summarized by the case author 13 This document is authorized for use only by AYMEN KAYAL in 2021. For the exclusive use of A. KAYAL, 2021. A R T I C L E www.hbr.org What Is the Right Supply Chain for Your Product? by Marshall L. Fisher Included with this full-text Harvard Business Review article: 1 Article Summary The Idea in Brief—the core idea The Idea in Practice—putting the idea to work 2 What Is the Right Supply Chain for Your Product? 13 Further Reading A list of related materials, with annotations to guide further exploration of the article’s ideas and applications Product 8509 This document is authorized for use only by AYMEN KAYAL in 2021. For the exclusive use of A. KAYAL, 2021. What Is the Right Supply Chain for Your Product? The Idea in Brief The Idea in Practice Are you frequently saddled with excess inventory? Do you suffer product shortages that have customers leaving stores in a huff? Do these supply chain headaches persist despite your investments in technologies such as automated warehousing and rapid logistics? Once you’ve determined whether your product is functional or innovative, follow these steps to match your supply chain to your product: COPYRIGHT © 2004 HARVARD BUSINESS SCHOOL PUBLISHING CORPORATION. ALL RIGHTS RESERVED. If so, you may be using the wrong supply chain for the type of product you sell. Suppose your offering is functional—it satisfies basic, unchanging needs and has a long life cycle, low margins, and stable demand. (Think paper towels or light bulbs.) In this case, you need an efficient supply chain— which minimizes production, transportation, and storage costs. But what if your product is innovative—it has great variety, a short life cycle, high profit margins, and volatile demand? (A line of laptops with a range of novel features is one example.) For this offering, you require a responsive supply chain. Fast and flexible, it helps you manage uncertainty through strategies such as cutting lead times and establishing inventory or excesscapacity buffers. Design the right supply chain for your product, and your profits soar. For example, by building responsiveness into its chain, innovative skiwear company Sport Obermeyer reduced its over- and underproduction costs by half—boosting profits 60%. Decide whether your current supply chain is efficient or responsive. Your chain is efficient if you satisfy predictable demand efficiently at the lowest possible cost, turn over inventory frequently, and select suppliers based on cost and quality. It’s responsive if you invest aggressively in reducing lead time for delivery; use standard components for different product versions; and choose suppliers for their speed, flexibility, and quality. Correct mismatches between your supply chain and product. If you’re using an efficient supply chain to sell innovative products, or a responsive supply chain to sell functional products, you’ve got a mismatch. You can correct it through several means: plenishment. Trucks delivered the required new stock that day. The program cut participating retailers’ inventories from four to two weeks of supply—representing significant cost savings. With retailers motivated to carry Campbell’s products and give them shelf space, Campbell’s sales doubled. Example: Sport Obermeyer made its supply chain more responsive to match its innovative skiwear products—of which 95% were completely new designs each year. The company managed uncertainty by soliciting early orders from important customers—slashing demand-forecast errors from 200% to 10%. It also shortened lead time by expediting design information to production centers. This approach resulted in more than 99% product availability for Sport Obermeyer’s retailers. • Change your product. Procter & Gamble had innovative products (extensive variety, frequent introductions of new offerings, and low profit margins) but an unresponsive supply chain. It began making many innovative product lines functional by reducing the number of product variations and simplifying pricing. • Change your supply chain. Make your chain more efficient for functional products, or more responsive for innovative products. Example: Campbell Soup made its supply chain more efficient to match its functional products. The company used electronic data interchange to coordinate closely with retailers. Every morning, retailers electronically informed Campbell of their demand for its products and inventory levels in their distribution centers. Using that information, Campbell forecasted future demand and determined which products needed re- This document is authorized for use only by AYMEN KAYAL in 2021. page 1 For the exclusive use of A. KAYAL, 2021. A simple framework can help you figure out the answer. What Is the Right Supply Chain for Your Product? COPYRIGHT © 2004 HARVARD BUSINESS SCHOOL PUBLISHING CORPORATION. ALL RIGHTS RESERVED. by Marshall L. Fisher Never has so much technology and brainpower been applied to improving supply chain performance. Point-of-sale scanners allow companies to capture the customer’s voice. Electronic data interchange lets all stages of the supply chain hear that voice and react to it by using ?exible manufacturing, automated warehousing, and rapid logistics. And new concepts such as quick response, ef?cient consumer response, accurate response, mass customization, lean manufacturing, and agile manufacturing offer models for applying the new technology to improve performance. Nonetheless, the performance of many supply chains has never been worse. In some cases, costs have risen to unprecedented levels because of adversarial relations between supply chain partners as well as dysfunctional industry practices such as an overreliance on price promotions. One recent study of the U.S. food industry estimated that poor coordination among supply chain partners was wasting $30 billion annually. Supply chains in many other industries suffer from an excess of some harvard business review • march–april 1997 products and a shortage of others owing to an inability to predict demand. One department store chain that regularly had to resort to markdowns to clear unwanted merchandise found in exit interviews that one-quarter of its customers had left its stores empty-handed because the speci?c items they had wanted to buy were out of stock. Why haven’t the new ideas and technologies led to improved performance? Because managers lack a framework for deciding which ones are best for their particular company’s situation. From my ten years of research and consulting on supply chain issues in industries as diverse as food, fashion apparel, and automobiles, I have been able to devise such a framework. It helps managers understand the nature of the demand for their products and devise the supply chain that can best satisfy that demand. The ?rst step in devising an effective supplychain strategy is therefore to consider the nature of the demand for the products one’s company supplies. Many aspects are important— This document is authorized for use only by AYMEN KAYAL in 2021. page 2 For the exclusive use of A. KAYAL, 2021. What Is the Right Supply Chain for Your Product? for example, product life cycle, demand predictability, product variety, and market standards for lead times and service (the percentage of demand ?lled from in-stock goods). But I have found that if one classi?es products on the basis of their demand patterns, they fall into one of two categories: they are either primarily functional or primarily innovative. And each category requires a distinctly different kind of supply chain. The root cause of the problems plaguing many supply chains is a mismatch between the type of product and the type of supply chain. Is Your Product Functional or Innovative? Marshall L. Fisher is the Stephen J. Heyman Professor of Operations and Information Management and codirector of the Fishman-Davidson Center for Service and Operations Management at the University of Pennsylvania’s Wharton School in Philadelphia. His current research focuses on how to manage the supply of products with hard-to-predict demand. Functional products include the staples that people buy in a wide range of retail outlets, such as grocery stores and gas stations. Because such products satisfy basic needs, which don’t change much over time, they have stable, predictable demand and long life cycles. But their stability invites competition, which often leads to low pro?t margins. To avoid low margins, many companies introduce innovations in fashion or technology to give customers an additional reason to buy their offerings. Fashion apparel and personal computers are obvious examples, but we also see successful product innovation where we least expect it. For instance, in the traditionally functional category of food, companies such as Ben & Jerry’s, Mrs. Fields, and Starbucks Coffee Company have tried to gain an edge with designer ?avors and innovative concepts. Century Products, a leading manufacturer of children’s car seats, is another company that brought innovation to a functional product. Until the early 1990s, Century sold its seats as functional items. Then it introduced a wide variety of brightly colored fabrics and designed a new seat that would move in a crash to absorb energy and protect the child sitting in it. Called Smart Move, the design was so innovative that the seat could not be sold until government product-safety standards mandating that car seats not move in a crash had been changed. Although innovation can enable a company to achieve higher pro?t margins, the very newness of innovative products makes demand for them unpredictable. In addition, their life cycle is short—usually just a few months—because as imitators erode the competitive advantage that innovative products enjoy, com- harvard business review • march–april 1997 panies 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. It may seem strange to lump technology and fashion together, but both types of innovation depend for their success on consumers changing some aspect of their values or lifestyle. For example, the market success of the IBM Thinkpad hinged in part on a novel cursor control in the middle of the keyboard that required users to interact with the keyboard in an unfamiliar way. The new design was so controversial within IBM that managers had dif?culty believing the enthusiastic reaction to the cursor control in early focus groups. As a result, the company underestimated demand—a problem that contributed to the Thinkpad’s being in short supply for more than a year. With their high pro?t margins and volatile demand, innovative products require a fundamentally different supply chain than stable, low-margin functional products do. To understand the difference, one should recognize that a supply chain performs two distinct types of functions: a physical function and a market mediation function. A supply chain’s physical function is readily apparent and includes converting raw materials into parts, components, and eventually ?nished goods, and transporting all of them from one point in the supply chain to the next. Less visible but equally important is market mediation, whose purpose is ensuring that the variety of products reaching the marketplace matches what consumers want to buy. Each of the two functions incurs distinct costs. Physical costs are the costs of production, transportation, and inventory storage. Market mediation costs arise when supply exceeds demand and a product has to be marked down and sold at a loss or when supply falls short of demand, resulting in lost sales opportunities and dissatis?ed customers. The predictable demand of functional products makes market mediation easy because a nearly perfect match between supply and demand can be achieved. Companies that make such products are thus free to focus almost exclusively on minimizing physical costs—a crucial goal, given the price sensitivity of most functional products. To that end, companies usually create a schedule for assembling ?nished goods for at least the next This document is authorized for use only by AYMEN KAYAL in 2021. page 3 For the exclusive use of A. KAYAL, 2021. What Is the Right Supply Chain for Your Product? Before devising a supply chain, consider the nature of the demand for your products. month and commit themselves to abide by it. Freezing the schedule in this way allows companies to employ manufacturing-resourceplanning software, which orchestrates the ordering, production, and delivery of supplies, thereby enabling the entire supply chain to minimize inventory and maximize production ef?ciency. In this instance, the important ?ow of information is the one that occurs within the chain as suppliers, manufacturers, and retailers coordinate their activities in order to meet predictable demand at the lowest cost. That approach is exactly the wrong one for innovative products. The uncertain market reaction to innovation increases the risk of shortages or excess supplies. High pro?t margins and the importance of early sales in establishing market share for new products increase the cost of shortages. And short product life cycles increase the risk of obsolescence and the cost of excess supplies. Hence market mediation costs predominate for these products, and they, not physical costs, should be managers’ primary focus. Most important in this environment is to read early sales numbers or other market signals and to react quickly, during the new product’s short life cycle. In this instance, the crucial ?ow of information occurs not only within the chain but also from the marketplace to the chain. The critical decisions to be made about inventory and capacity are not about minimizing costs but about where in the chain to position inventory and available production capacity in order to hedge against uncertain demand. And suppliers should be chosen for their speed and ?exibility, not for their low cost. Sport Obermeyer and Campbell Soup Company illustrate the two environments and how the resulting goals and initiatives differ. Sport Obermeyer is a major supplier of fashion skiwear. Each year, 95% of its products are completely new designs for which demand forecasts often err by as much as 200%. And because the retail season is only a few months long, the company has little time to react if it misguesses the market. In contrast, only 5% of Campbell’s products are new each year. Sales of existing products, most of which have been on the market for years, are highly predictable, allowing Campbell to achieve a nearly perfect service level by harvard business review • march–april 1997 satisfying more than 98% of demand immediately from stocks of ?nished goods. And even the few new products are easy to manage. They have a replenishment lead time of one month and a minimum market life cycle of six months. When Campbell introduces a product, it deploys enough stock to cover the most optimistic forecast for demand in the ?rst month. If the product takes off, more can be supplied before stocks run out. If it ?ops, the six-month, worst-case life cycle affords plenty of time to sell off the excess stocks. How do goals and initiatives differ in the two environments? Campbell’s already high service level leaves little room for improvement in market mediation costs. Hence, when the company launched a supply chain program in 1991 called continuous replenishment, the goal was physical ef?ciency. And it achieved that goal: the inventory turns of participating retailers doubled. In contrast, Sport Obermeyer’s uncertain demand leads to high marketmediation costs in the form of losses on styles that don’t sell and missed sales opportunities due to the “stockouts” that occur when demand for particular items outstrips inventories. The company’s supply chain efforts have been directed at reducing those costs through increased speed and ?exibility. Although the distinctions between functional and innovative products and between physical ef?ciency and responsiveness to the market seem obvious once stated, I have found that many companies founder on this issue. That is probably because products that are physically the same can be either functional or innovative. For example, personal computers, cars, apparel, ice cream, coffee, cookies, and children’s car seats all can be offered as a basic functional product or in an innovative form. It’s easy for a company, through its product strategy, to gravitate from the functional to the innovative sphere without realizing that anything has changed. Then its managers start to notice that service has mysteriously declined and inventories of unsold products have gone up. When this happens, they look longingly at competitors that haven’t changed their product strategy and therefore have low inventories and high service. They even may steal away the vice president of logistics from one of those companies, reasoning, If we hire their logistics guy, we’ll have low inventory and high service, This document is authorized for use only by AYMEN KAYAL in 2021. page 4 For the exclusive use of A. KAYAL, 2021. What Is the Right Supply Chain for Your Product? too. The new vice president invariably designs an agenda for improvement based on his or her old environment: cut inventories, pressure marketing to be accountable for its forecasts and to freeze them well into the future to remove uncertainty, and establish a rigid just-in-time delivery schedule with suppliers. The worst thing that could happen is that he or she actually succeeds in implementing that agenda, because it’s totally inappropriate for the company’s now unpredictable environment. Devising the Ideal Supply-Chain Strategy For companies to be sure that they are taking Functional Versus Innovative Products: Differences in Demand Functional (Predictable Demand) Innovative (Unpredictable Demand) Product life cycle more than 2 years 3 months to 1 year Contribution margin* 5% to 20% 20% to 60% Product variety low (10 to 20 variants per category) high (often millions of variants per category) Average margin of error in the forecast at the time production is committed 10% 40% to 100% Average stockout rate 1% to 2% 10% to 40% Average forced end-ofseason markdown as percentage of full price 0% 10% to 25% Lead time required for made-to-order products 6 months to 1 year 1 day to 2 weeks Aspects of Demand * The contribution margin equals price minus variable cost divided by price and is expressed as a percentage. harvard business review • march–april 1997 the right approach, they ?rst must determine whether their products are functional or innovative. Most managers I’ve encountered already have a sense of which products have predictable and which have unpredictable demand: the unpredictable products are the ones generating all the supply headaches. For managers who aren’t sure or who would like to con?rm their intuition, I offer guidelines for classifying products based on what I have found to be typical for each category. (See the table “Functional Versus Innovative Products: Differences in Demand.”) The next step is for managers to decide whether their company’s supply chain is physically ef?cient or responsive to the market. (See the table “Physically Ef?cient Versus Market-Responsive Supply Chains.”) Having determined the nature of their products and their supply chain’s priorities, managers can employ a matrix to formulate the ideal supply-chain strategy. The four cells of the matrix represent the four possible combinations of products and priorities. (See the exhibit “Matching Supply Chains with Products.”) By using the matrix to plot the nature of the demand for each of their product families and its supply chain priorities, managers can discover whether the process the company uses for supplying products is well matched to the product type: an ef?cient process for functional products and a responsive process for innovative products. Companies that have either an innovative product with an ef?cient supply chain (upper right-hand cell) or a functional product with a responsive supply chain (lower left-hand cell) tend to be the ones with problems. For understandable reasons, it is rare for companies to be in the lower left-hand cell. Most companies that introduce functional products realize that they need ef?cient chains to supply them. If the products remain functional over time, the companies typically have the good sense to stick with ef?cient chains. But, for reasons I will explore shortly, companies often ?nd themselves in the upper righthand cell. The reason a position in this cell doesn’t make sense is simple: for any company with innovative products, the rewards from investments in improving supply chain responsiveness are usually much greater than the rewards from investments in improving the chain’s ef?ciency. For every dollar such a com- This document is authorized for use only by AYMEN KAYAL in 2021. page 5 For the exclusive use of A. KAYAL, 2021. What Is the Right Supply Chain for Your Product? pany invests in increasing its supply chain’s responsiveness, it usually will reap a decrease of more than a dollar in the cost of stockouts and forced markdowns on excess inventory that result from mismatches between supply and demand. Consider a typical innovative product with a contribution margin of 40% and an average stockout rate of 25%.1 The lost contribution to pro?t and overhead resulting from stockouts alone is huge: 40% x 25% = 10% of sales—an amount that usually exceeds pro?ts before taxes. Consequently, the economic gain from reducing stockouts and excess inventory is so great that intelligent investments in supply chain responsiveness will always pay for themselves—a fact that progressive companies have discovered. Compaq, for example, decided to continue producing certain high-variety, short- life-cycle circuits in-house rather than outsource them to a low-cost Asian country, because local production gave the company increased ?exibility and shorter lead times. World Company, a leading Japanese apparel manufacturer, produces its basic styles in lowcost Chinese plants but keeps production of high-fashion styles in Japan, where the advantage of being able to respond quickly to emerging fashion trends more than offsets the disadvantage of high labor costs. That logic doesn’t apply to functional products. A contribution margin o.
