Right Supply chain for your product

8/11/2019 Right Supply chain for your product

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Never has so muchtechnology andbrainpower beenapplied to improvingsupply chainperformance. Point-of-sale scanners allowcompanies to capturethe customer's voice.Electronic datainterchange lets allstages of the supplychain hear that voiceand react to it by usingexible manufacturing,automatedwarehousing, and rapidlogistics. nd newconcepts such as !uic"response, e#cientconsumer response,accurate response,mass customi$ation,lean manufacturing,and agilemanufacturing o%ermodels for applyingthe new technology toimprove performance.

Nonetheless, theperformance of manysupply chains hasnever been worse. &nsome cases, costshave risen tounprecedented levelsbecause of adversarialrelations betweensupply chain partnersas well asdysfunctional industrypractices such as anoverreliance on pricepromotions. nerecent study of the(.). food industryestimated that poorcoordination amongsupply chain partnerswas wasting *+ billionannually. )upply chainsin many otherindustries su%er froman excess of someproducts and ashortage of othersowing to an inability topredict demand. ne

department store chainthat regularly had toresort to mar"downs toclear unwantedmerchandise found in

exit interviews thatone-!uarter of itscustomers had left itsstores empty-handedbecause the specicitems they had wantedto buy were out ofstoc".

hy haven't the newideas and technologies

led to improvedperformance/ 0ecausemanagers lac" aframewor" for decidingwhich ones are best fortheir particularcompany's situation.1rom my ten years ofresearch andconsulting on supplychain issues in

industries as diverseas food, fashionapparel, andautomobiles, & havebeen able to devisesuch a framewor". &thelps managersunderstand the natureof the demand for theirproducts and devisethe supply chain that

can best satisfy thatdemand.

2he rst step indevising an e%ectivesupply-chain strategyis therefore to considerthe nature of the

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fashion together, butboth types of innovation depend fortheir success onconsumers changing

some aspect of theirvalues or lifestyle. 1orexample, the mar"etsuccess of the &032hin"pad hinged inpart on a novel cursorcontrol in the middle ofthe "eyboard thatre!uired users tointeract with the"eyboard in an

unfamiliar way. 2henew design was socontroversial within&03 that managers haddi#culty believing theenthusiastic reaction tothe cursor control inearly focus groups. sa result, the companyunderestimateddemand D a problem

that contributed to the2hin"pad's being inshort supply for morethan a year.

ith their high protmargins and volatiledemand, innovativeproducts re!uire afundamentally

di%erent supply chainthan stable, low-margin functionalproducts do. 2ounderstand thedi%erence, one shouldrecogni$e that a supplychain performs twodistinct types of functions; a physicalfunction and a market

mediation function. supply chain's physicalfunction is readilyapparent and includesconverting rawmaterials into parts,components, andeventually nishedgoods, andtransporting all ofthem from one point in

the supply chain to thenext. =ess visible bute!ually important ismar"et mediation,

whose purpose isensuring that thevariety of productsreaching themar"etplace matches

what consumers wantto buy.

Each of the twofunctions incursdistinct costs. Physicalcosts are the costs ofproduction,transportation, andinventory storage.3ar"et mediation costs

arise when supplyexceeds demand and aproduct has to bemar"ed down and soldat a loss or whensupply falls short ofdemand, resulting inlost sales opportunitiesand dissatisedcustomers.

2he predictabledemand of functionalproducts ma"esmar"et mediation easy

3

Functional Versus Innovative Products: Diferences in Demand

spects of :emand1unctional @Predictable

:emandA&nnovative @(npredictable :emandA

Product =ife ?ycle 3ore than F years + months to 4 year?ontribution3arginG

HI to FI FI to JI

Product 9ariety=ow @4-F variants per

categoryA7igh @often millions of variants per

categoryA

verage margin oferror in the forecastat the timeproduction iscommitted

4I KI to 4I

verage stoc"outrate

4I to FI 4I to KI

verage forcedend-of-seasonmar"down aspercentage of fullprice

I

4I to FHI

=ead time re!uiredfor made-to-orderproducts

J months to 4 year4 day to F wee"s


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because a nearlyperfect match betweensupply and demandcan be achieved.?ompanies that ma"esuch products are thusfree to focus almostexclusively onminimi$ing physicalcosts a crucial goal,given the pricesensitivity of mostfunctional products. 2othat end, companiesusually create aschedule forassembling nishedgoods for at least thenext month andcommit themselves toabide by it. 1ree$ingthe schedule in thisway allows companiesto employmanufacturing-resource-planningsoftware, whichorchestrates the

ordering, production,and delivery of supplies, therebyenabling the entiresupply chain tominimi$e inventoryand maximi$eproduction e#ciency.&n this instance, theimportant ow of information is the onethat occurs within thechain as suppliers,manufacturers, andretailers coordinatetheir activities in orderto meet predictabledemand at the lowestcost.

2hat approach isexactly the wrong onefor innovativeproducts. 2heuncertain mar"etreaction to innovationincreases the ris" ofshortages or excess

supplies. 7igh protmargins and theimportance of earlysales in establishingmar"et share for newproducts increase thecost of shortages. ndshort product lifecycles increase the ris"of obsolescence andthe cost of excesssupplies. 7ence mar"etmediation costspredominate for theseproducts, and they, notphysical costs, shouldhe managers' primaryfocus.

3ost important in thisenvironment is to readdaily sales numbers orother mar"et signalsand to react !uic"ly,during the newproduct's short lifecycle. &n this instance,the crucial ow of

4

Physically Ecient Versus Market-Responsive upply !hainPhysically EcientProcess

Market-Responsive Proces

Primary Purpose

)upply predictabledemand e#ciently at thelowest possible cost

8espond !uic"ly unpredictable demand in oto minimi$e stoc"outs, for

mar"downs, and obsoinventory

Manu"acturin# "ocus3aintain high averageutili$ation rate

:eploy excess bu%er capacity

Inventory strate#y


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information occurs notonly within the chainbut also from themar"etplace to thechain. 2he criticaldecisions to be made

about inventory andcapacity are not aboutminimi$ing costs butabout where in thechain to positioninventory and availableproduction capacity inorder to hedge againstuncertain demand. ndsuppliers should bechosen for their speed

and exibility, not fortheir low cost.

)port bermeyer and?ampbell )oup?ompany illustrate thetwo environments andhow the resulting goalsand initiatives di%er.)port bermeyer is amaor supplier of

fashion s"iwear. Eachyear, 5HI of itsproducts arecompletely newdesigns for whichdemand forecastsoften err by as muchas FI. nd because

the retail season isonly a few monthslong, the company haslittle time to react if itmisguesses themar"et.

&n contrast, only HI of?ampbell's productsare new each year.)ales of existingproducts, most ofwhich have been onthe mar"et for years,are highly predictable,allowing ?ampbell toachieve a nearly

perfect service level bysatisfying more than5LI of demandimmediately fromstoc"s of nishedgoods. nd even thefew new products areeasy to manage. 2heyhave a replenishmentlead time of one monthand a minimum mar"et

life cycle of sixmonths. hen?ampbell introduces aproduct, it deploysenough stoc" to coverthe most optimisticforecast for demand inthe rst month. &f the

product ta"es o%, morecan be supplied beforestoc"s run out. &f itops, the six-month,worst-case life cyclea%ords plenty of time

to sell o% the excessstoc"s.

7ow do goals andinitiatives di%er in thetwo environments/?ampbell's alreadyhigh service levelleaves little room forimprovement inmar"et mediation

costs. 7ence, when thecompany launched asupply chain programin 4554 calledcontinuousreplenishment, thegoal was physicale#ciency. nd itachieved that goalM theinventory turns ofparticipating retailers

doubled. &n contrast,)port bermeyer'suncertain demandleads to high mar"et-mediation costs in theform of losses on stylesthat don't sell andmissed sales

5

Matchin# upply !hains &ith Products

1unctional Products &nnovative Products

E#cient )upply ?hain 3atch 3ismatch

8esponsive )upply?hain

3ismatch 3atch


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opportunities due tothe stoc"outs thatoccur when demandfor particular itemsoutstrips inventories.

2he company's supplychain e%orts havebeen directed atreducing those coststhrough increasedspeed and exibility.

lthough thedistinctions betweenfunctional andinnovative products

and between physicale#ciency andresponsiveness to themar"et seem obviousonce stated, & havefound that manycompanies founder onthis issue. 2hat isprobably becauseproducts that arephysically the same

can be eitherfunctional orinnovative. 1orexample, personalcomputers, cars,apparel, ice cream,co%ee, coo"ies, andchildren's car seats allcan be o%ered as abasic functionalproduct or in an

innovative form.

&t's easy for acompany, through itsproduct strategy, togravitate from thefunctional to theinnovative sphere

without reali$ing thatanything has changed.2hen its managersstart to notice thatservice has

mysteriously declinedand inventories ofunsold products havegone up. hen thishappens, they loo"longingly atcompetitors thathaven't changed theirproduct strategy andtherefore have lowinventories and high

service. 2hey evenmay steal away thevice president of logis-tics from one of thosecompanies, reasoning,if we hire their logisticsguy, we'll have lowinventory and highservice, too. 2he newvice presidentinvariably designs an

agenda forimprovement based onhis or her oldenvironment; cutinventories, pressuremar"eting to beaccountable for itsforecasts and to free$ethem well into thefuture to removeuncertainty, and

establish a rigid ust-in-time delivery schedulewith suppliers. 2heworst thing that couldhappen is that he orshe actually succeedsin implementing thatagenda, because it's

totally inappropriatefor the company's nowunpredictableenvironment.

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1or companies to besure that they areta"ing the rightapproach, they rstmust determinewhether their productsare functional orinnovative. 3ost

managers &'veencountered alreadyhave a sense of whichproducts havepredictable and whichhave unpredictabledemand. 2heunpredictable productsare the onesgenerating all thesupply headaches. 1or

managers who aren'tsure or who would li"eto conrm theirintuition, & o%erguidelines forclassifying productsbased on what & havefound to he typical foreach category. @)eethe table 1unctional9ersus &nnovative

Products; :i%erencesin :emand.A 2he nextstep is for managers todecide whether theircompany's supplychain is physicallye#cient or responsiveto the mar"et. @)ee the

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table PhysicallyE#cient 9ersus3ar"et-8esponsive)upply ?hains.A

7aving determined thenature of theirproducts and theirsupply chain'spriorities, managerscan employ a matrix toformulate the idealsupply-chain strategy.2he four cells of thematrix represent thefour possible

combinations of products and priorities.@)ee the exhibit3atching )upply?hains with Products.0y using the matrix toplot the nature of thedemand for each oftheir product familiesand its supply chainpriorities, managers

can discover whetherthe process thecompany uses forsupplying products iswell matched to theproduct type; ane#cient process forfunctional productsand a responsiveprocess for innovativeproducts. ?ompanies

that have either aninnovative productwith an e#cient supplychain @upper right-hand cellA or afunctional product witha responsive supplychain @lower left-hand

cellA tend to be theones with problems.

1or understandablereasons, it is rare for

companies to be in thelower left-hand cell.3ost companies thatintroduce functionalproducts reali$e thatthey need e#cientchains to supply them.&f the products remainfunctional over time,the companiestypically have the good

sense to stic" withe#cient chains. 0ut,for reasons & willexplore shortly,companies often ndthemselves in theupper right-hand cell.2he reason a positionin this cell doesn'tma"e sense is simple;for any company with

innovative products,the rewards frominvestments inimproving supply chainresponsiveness areusually much greaterthan the rewards frominvestments inimproving the chain'se#ciency. 1or everydollar such a company

invests in increasing itssupply chain'sresponsiveness, itusually will reap adecrease of more thana dollar in the cost ofstoc"outs and forcedmar"downs on excess

inventory that resultfrom mismatchesbetween supply anddemand. ?onsider atypical innovative

product with acontribution margin ofKI and an averagestoc"out rate of FHI.4

2he lost contribution toprot and overheadresulting fromstoc"outs alone ishuge; KI x FHI O4I of sales D anamount that usually

exceeds prots beforetaxes.

?onse!uently, theeconomic gain fromreducing stoc"outs andexcess inventory is sogreat that intelligentinvestments in supplychain responsivenesswill always pay for

themselves D a factthat progressivecompanies havediscovered. ?ompa!,for example, decidedto continue producingcertain high-variety,short-life-cycle circuits

1 2he contribution margine!uals price minus variablecost divided by price and is

expressed as a percentage.2his type of prot marginmeasures increases inprots produced by theincremental sales thatresult from fewer stoc"outs.?onse!uently, it is a goodway to trac" improvementsin inventory management.

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in-house rather thanoutsource them to alow-cost sian country,because localproduction gave the

company increasedexibility and shorterlead times. orld?ompany, a leadingCapanese apparelmanufacturer,produces its basicstyles in low-cost?hinese plants but"eeps production ofhigh-fashion styles in

Capan, where theadvantage of beingable to respond !uic"lyto emerging fashiontrends more thano%sets thedisadvantage of highlabor costs.

2hat logic doesn'tapply to functional

products. contribution margin of4I and an averagestoc"out rate of 4Imean lost contributionto prot and overheadof only .4I of sales Da negligible cost thatdoesn't warrant thesignicant investmentsre!uired to improve

responsiveness.


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car that could be madein F million. &n otherwords, the autodistribution channel isa "ind of hourglass

with the dealer at thenec". t the top of theglass, plants, whichintroduce innovationsin color and technologyevery year, canprovide an almostinnite variety ofoptions. t the bottom,a multitude of customers with diverse

tastes could benetfrom that variety butare unable to becauseof dealers' practices atthe nec" of the glass.

2he computer industryof F years ago showsthat a company cansupply an innovativeproduct with an

unresponsive process ifthe mar"et allows it along lead time fordelivery. &n my rst obafter college, & wor"edin an &03 sales o#cehelping to mar"et the)ystem+Jmainframe. & wasshoc"ed to learn that&03 was then !uoting a

4K-month lead time forthis hot new product. &as"ed how & couldpossibly tell acustomer to wait thatlong. 2he answer wasthat if a customerreally wanted a +J, it

would wait, and that if& couldn't persuade itto wait, there must besomething seriouslylac"ing in my sales

s"ills, 2hat answer wasactually correct; leadtimes of one to twoyears were then thenorm. 2his meant thatcomputermanufacturers hadplenty of time toorgani$e their suppliesaround physicale#ciency.

Now P?s andwor"stations havereplaced mainframesas the dominanttechnology, and theacceptable lead timehas dropped to days.>et because theindustry has largelyretained its emphasis

on a physicallye#cient supply chain,most computercompanies ndthemselves rmlypositioned in the upperright-hand cell of thematrix.

2hat mismatch hasengendered a "ind of

schi$ophrenia in theway computercompanies view theirsupply chains. 2heycling to measures ofphysical e#ciencysuch as plant capacityutili$ation and

inventory turnsbecause thosemeasures are familiarfrom their mainframedays. >et the

mar"etplace "eepspulling them towardmeasures of responsiveness suchas product availability.

7ow does a companyin the upper right-handcell overcome itsschi$ophrenia/ Eitherby moving to the left

on the matrix andma"ing its productsfunctional or bymoving down thematrix and ma"ing itssupply chainresponsive. 2he correctdirection depends onwhether the product issu#ciently innovativeto generate enough

additional prot tocover the cost of ma"ing the supplychain responsive.

sure sign that acompany needs tomove to the left is if ithas a product linecharacteri$ed byfre!uent introductions

of new o%erings, greatvariety, and low protmargins. 2oothpaste isa good example. fewyears ago, & was togive a presentation toa food industry group. &decided that a good

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way to demonstratethe dysfunctional levelof variety that exists inmany grocerycategories would be to

buy one of each typeof toothpaste made bya particularmanufacturer andpresent the collectionto my audience hen &went to my localsupermar"et to buy mysamples, & found thatFL varieties wereavailable. few

months later, when &mentioned thisdiscovery to a seniorvice president of acompetingmanufacturer, heac"nowledged that hiscompany also had FLtypes of toothpaste -one to match each ofthe rival's o%erings.

:oes the world needFL "inds of toothpastefrom eachmanufacturer/ ProcterB 11(N?2&N=P8:(?2)

?ost reduction isfamiliar territory, andmost companies havebeen at it for years.Nevertheless, there aresome new twists to

this old game. scompanies haveaggressively pursuedcost cutting over theyears, they havebegun to reach thepoint of diminishingreturns within theirorgani$ation's ownboundaries and nowbelieve that better

coordination acrosscorporate boundariesD with suppliers anddistributors D presentsthe greatestopportunities. 7appily,the growingacceptance of this

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?ampbell system. 1orexample, chic"en-boning plants had togo on overtimestarting in ctober to

meet the bulge. @)eethe graph 7ow?ampbell's PricePromotions :isrupted&ts )upply )ystem.A8ecogni$ing theproblem, ?ampbellre!uired its retailcustomers on thecontinuous-replenishment

program to waive theoption of forwardbuying at a discountedprice. retailer thatpromotes ?ampbellproducts in its storesby o%ering adiscounted price toconsumers has twooptions; it can pay?ampbell an everyday

low price e!ual to theaverage price that aretailer receiving thepromotional dealswould pay or it canreceive a discount onorders resulting fromgenuine increases insales to consumers.

2he ?ampbell example

o%ers some valuablelessons. 0ecause soupis a functional productwith price-sensitivedemand, ?ampbell wascorrect to pursuephysical e#ciency.)ervice D or the in-

stoc" availability of?ampbell products at aretailer's distributioncenter D did increasemarginally, from 5L.HI

to 55.FI. 0ut the biggain for the supplychain was in increasedoperating e#ciency,through the reductionin retailers'inventories. 3ostretailers gure that thecost of carrying theinventory of a givenproduct for a year

e!uals at least FHI ofwhat they paid for theproduct. two-wee"inventory reductionrepresents a costsavings e!ual to nearly4I of sales. )ince theaverage retailer'sprots e!ual about FIof sales, this savings isenough to increase

prots by HI.

0ecause the retailerma"es more money on?ampbell productsdelivered throughcontinuousreplenishment, it hasan incentive to carry abroader line of themand to give them more

shelf space. 1or thatreason, ?ampbellfound that after it hadintroduced theprogram, sales of itsproducts grew twice asfast throughparticipating retailers

as they did throughother retailers.(nderstandably, super-mar"et chains loveprograms such as

?ampbell's. egmans1ood 3ar"ets, withstores in upstate New>or", has evenaugmented itsaccounting system sothat it can measureand reward supplierswhose products costthe least to stoc" andsell.

2here is also animportant principleabout the supply offunctional productslur"ing in theeveryday low pricefeature of ?ampbell'sprogram. ?onsumersof functional productso%er companies

predictable demand inexchange for a goodproduct and areasonable price. 2hechallenge is to avoidactions that woulddestroy the inherentsimplicity of thisrelationship. 3anycompanies go astraybecause they get

hoo"ed on overusingprice promotions. 2heystart by using priceincentives to pulldemand forward intime to meet a!uarterly revenuetarget. 0ut pulling

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demand forward helpsonly once. 2he next!uarter, a companyhas to pull demandforward again ust to

ll the hole created bythe rst incentive. 2heresult is an addiction toincentives that turnssimple, predictabledemand into a chaoticseries of spi"es thatonly add to cost.

1inally, the ?ampbellstory illustrates a

di%erent way forsupply chain partnersto interact in thepursuit of higherprots. 1unctionalproducts such asgroceries are usuallyhighly price-sensitive,and negotiations alongthe supply chain canbe erce. &f a company

can get its supplier tocut its price by a pennyand its customer toaccept a one-centprice increase, thoseconcessions can havea huge impact on thecompany's prots. &nthis competitive modelof supply chainrelations, costs in the

chain are assumed tobe xed, and themanufacturer and theretailer competethrough pricenegotiations for abigger share of thexed prot pie. &n

contrast, ?ampbell'scontinuous-replenishmentprogram embodies amodel in which the

manufacturer and theretailer cooperate tocut costs throughoutthe chain, therebyincreasing the si$e ofthe pie.

2he cooperative modelcan be powerful, but itdoes have pitfalls. 2oooften, companies

reason that therenever can be too manyways to ma"e money,and they decide toplay the cooperativeand competitivegames at the sametime. 0ut that tacticdoesn't wor", becausethe two approachesre!uire diametrically

di%erent behavior. 1orexample, considerinformation sharing. &fyou are my supplierand we an negotiatingover price, the lastthing you want to do isfully share with meinformation about yourcosts. 0ut that is whatwe both must do if we

want to reduce supplychain costs byassigning each tas" towhichever of us canperform it mostcheaply.

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(ncertainty aboutdemand is intrinsic to

innovative products. sa result, guring outhow to cope with it isthe primary challengein creating aresponsive supplyprocess for suchproducts. & have seencompanies use fourtools to cope withuncertainty in demand.

2o fashion a responsivesupply process,managers need tounderstand each ofthem and then blendthem in a recipe that'sright for theircompany's particularsituation.

lthough it may sound

obvious, the rst stepfor many companies issimply to accept thatuncertainty is inherentin innovative products.?ompanies that grewup in an oligopoly withless competition, moredocile customers, andwea"er retailers nd itdi#cult to accept the

high levels of demanduncertainty that existtoday in manymar"ets. 2hey have atendency to declare ahigh level of forecasterrors unacceptable,and they virtually

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command their peopleto thin" hard enoughand long enough toachieve accuracy intheir forecasts. 0ut

these companies can'tremove uncertainty bydecree. hen it comesto innovative products,uncertainty must beaccepted as good. &fthe demand for aproduct werepredictable, thatproduct probablywould not be

su#ciently innovativeto command high protmargins. 2he fact isthat ris" and return arelin"ed, and the highestprot margins usuallygo with the highest ris"in demand.

nce a company hasaccepted the

uncertainty of demand,it can employ threecoordinated strategiesto manage thatuncertainty. &t cancontinue to strive toreduce uncertainty Dfor example, by ndingsources of new datathat can serve asleading indicators or

by having di%erentproducts sharecommon componentsas much as possible sothat the demand forcomponents becomesmore predictable. &tcan avoid uncertainty

by cutting lead timesand increasing thesupply chain'sexibility so that it canproduce to order or at

least manufacture theproduct at a timecloser to when demandmateriali$es and canbe accurately forecast.1inally, onceuncertainty has beenreduced or avoided asmuch as possible, itcan hedge against theremaining residual

uncertainty withbu%ers of inventory orexcess capacity. 2heexperiences of National 0icycle, asubsidiary of 3atsushita Electric,and of )portbermeyer illustratethe di%erent ways inwhich these three

strategies can beblended to create aresponsive supplychain. National 0icycleprospered for decadesas a small butsuccessful division. 0utby the mid-45Ls, itwas in trouble. 0icyclesin Capan werefunctional products

bought mainly as aninexpensive means oftransportation, andsales were at.0icycles had become acommodity sold on thebasis of low price, andCapan's high labor

costs left National0icycle unable tocompete withinexpensive bi"es from2aiwan and Rorea.

&n 45LJ, in an attemptto salvage thesituation 3atsushitaappointed as presidentof National anexecutive from anotherdivision who had noexperience in bicycles.2he new president,3a"oto Romoto, saw

that the division hadmany strengths;technical expertise inmanufacturing andcomputers, a highlys"illed wor"force, astrong brand name@PanasonicA, and anetwor" of 5,dealers. Romoto alsonoticed that National

0icycle had aninnovative productsegment that enoyedhigh prot margins;sports bicycles thataSuent customersbought purely forrecreation. 7econcluded thatNational's only hopewas to focus on that

segment and use thedivision's strengths todevelop a responsivechain that could supplysports bi"es whileavoiding the high ris"of overproduction thatresulted from their

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short life cycle anduncertain demand.

ccording to Romoto'svision, a customer

would visit a Panasonicdealership and choosea bi"e from a selectionof F million options forcombining si$e, color,and components, usinga special measuringstand to nd the exactsi$e of the frame thathe or she needed. 2heorder would be faxed

to the factory, wherecomputer-controlledwelding e!uipmentand s"illed wor"erswould ma"e the bi"eand deliver it to thecustomer within twowee"s.

Romoto's radical visionbecame a reality in

45L6. 0y 4554, fueledby this innovation,National 0icycle hadincreased its share ofthe sports bicyclemar"et in Capan fromHI to F5I. &t wasmeeting the two-wee"lead time 55.55I ofthe time and was inthe blac".

National 0icycle'ssuccess is a goodexample of aresponsive supplychain achievedthrough avoidinguncertainty. National

has little idea whatcustomers will orderwhen they wal" into aretail shop, but thatdoesn't matter; its

produce-to-ordersystem allows it tomatch supply withdemand as it happens.0y radically increasingthe number of choicesfrom a few types ofbi"es to F million, itcan induce thecustomer to sacriceimmediate availability

and wait two wee"s fora bicycle.

National's program ispart of a newmovement called masscustomization; buildingthe ability to customi$ea large volume ofproducts and deliverthem at close to mass-

production prices.3any other companieshave found that they,too, can benet fromthis strategy. 1orexample, =utronElectronics of ?oopersburg,Pennsylvania, becamethe world leader indimmer switches and

other lighting controlsby giving customers anessentially unlimitedchoice of technical andfashion features. )ays3ichael . Pessina,=utron's vice presidentof manufacturing

operations, ith ourdiverse product line,customer demand canbe impossible topredict. >et by

conguring products atthe time of order, wecan o%er customerstremendous varietyand ll orders very!uic"ly without havingto stoc" a hugeamount of inventory.

3ass customi$ation isnot without its

challenges. 1orexample, what doesNational 0icycle dowith its plant duringthe winter, when noone is buying bi"es/ &tbuilds an inventory ofhigh-end sportsbicycles. &n addition,mass customi$ation isnot necessarily cheap.

National's customproduction re!uiresthree times more laborthan assembly-linemass production ofbi"es. &nterestingly,one of the mainreasons why 7enry1ord in the early 45smoved in the oppositedirection D from craft

to mass production Dwas to slash laborcosts, which hesucceeded in doing bya factor of three. )owhat has changed toma"e customproduction viable now/

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Suent consumers arewilling to pay for high-margin, innovativeproductsM and thoseproducts re!uire a

di%erent, moreexpensive, but moreresponsive productionprocess than thefunctional 3odel 2 did.

)port bermeyer,which is based inspen, ?olorado,designs andmanufactures fashion

s"iwear and distributesit through Lspecialty retailerslocated throughout the(nited )tates. 0ecause5HI of its products arenew each year, itconstantly faces thechallenges and ris"s ofdemand uncertainty;stoc"outs of hot styles

during the sellingseason and leftoverinventory of dogs atthe end of the season.&n 4554, the company'svice president, alter8. bermeyer,launched a proect toattac" those problemsby blending the threestrategies of reducing,

avoiding, and hedgingagainst uncertainty. 2oreduce uncertainty,)port bermeyersolicited early ordersfrom importantcustomers; thecompany invited its FH

largest retailers tospen each 1ebruaryto evaluate its newline. )port bermeyerfound that the early

orders from thishandful of retailerspermitted it to forecastnational demand for allits products with amargin of error of ust4I.

lthough it was helpfulto get this informationseveral months before

)port bermeyer wasre!uired to ship itsproducts in )eptember,it didn't solve thecompany's problem,because long leadtimes forced it tocommit itself toproducts well before1ebruary. bermeyerconcluded that each

day shaved o% thelead time would savethe company *FH,because that was theamount it spent eachday at the end of )eptember shippingproducts by air fromplants in sia to havethem in stores by earlyctober D the start of

the retail season. ncethat gure wasannounced toemployees, they foundall "inds of ways toshorten the lead time.1or example, theperson who had

dutifully used standardmail service to getdesign information tothe productionmanager in 7ong Rong

reali$ed that the *FHexpress-mail chargewas a bargaincompared with the*FH, per day inadded costs resultingfrom longer lead timescaused by mail delays.2hrough such e%orts,)port bermeyer wasable to avoid

uncertainty on half ofits production bycommitting thatproduction after earlyorders had beenreceived in 1ebruary.

Nevertheless, thecompany still had tocommit half of theproduction early in the

season, when demandwas uncertain. hichstyles should it ma"ethen/ &t would stand toreason that theyshould be the styles forwhich )portbermeyer had themost condence in itsforecasts. 0ut howcould it tell which

those were/ 2hen thecompany noticedsomething interesting.bermeyer had as"edeach of the sixmembers of acommittee responsiblefor forecasting to

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construct a forecast forall products, and heused the average ofthe six forecasts as thecompany's forecast.

fter one year of tryingthis method, thecompany found thatwhen the six individualforecasts agreed, theaverage was accurate,and when theydisagreed, the averagewas inaccurate. 2hisdiscovery gave )portbermeyer a means of

selecting the styles toma"e early. (sing thisin-formation as well asdata on the cost ofoverproduction andunderproduction, itdeveloped a model forhedging against theris" of both problems.2he model tells thecompany exactly how

much of each style toma"e early in theproduction season@which begins nearly ayear before the retailseasonA and how muchto ma"e in 1ebruary,after early orders arereceived.

)port bermeyer's

approach, which hasbeen called accurateresponse, has cut thecost of bothoverproduction andunderproduction in halfD enough to increaseprots by JI. nd

retailers love the factthat the system resultsin more than 55Iproduct availability;they have ran"ed )port

bermeyer numberone in the industry forservice. @)ee 3a"ing)upply 3eet :emandin an (ncertain orld,by 3arshall =. 1isher,Canice 7. 7ammond,alter 8. bermeyer,and nanth 8aman,708 3ay-Cune 455K.A

?ompanies such as)port bermeyer,National 0icycle, and?ampbell )oup,however, are still theexceptions. 3anagersat many companiescontinue to lamentthat although they"now their supplychains are riddled with

waste and generategreat dissatisfactionamong customers,they don't "now whatto do about theproblem. 2he rootcause could very wellbe a misalignment oftheir supply andproduct strategies.8ealigning the two is

hardly easy. 0ut thereward D a remar"ablecompetitive advantagethat generates highgrowth in sales andprots D ma"es thee%ort worth it.

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Right Supply chain for your product

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