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Functional Versus Innovative Products

Functional Versus Innovative Products. FUNCTIONAL Mature product Low product variety Predictable demand Established product categories Low margins Low forecasting error. INNOVATIVE Early life cycle stage High product variety Unpredictable demand, e.g., fashions

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Functional Versus Innovative Products

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  1. Functional Versus Innovative Products • FUNCTIONAL • Mature product • Low product variety • Predictable demand • Established product categories • Low margins • Low forecasting error • INNOVATIVE • Early life cycle stage • High product variety • Unpredictable demand, e.g., fashions • New product categories • High margins • High forecasting error

  2. Efficient Versus Market-Responsive Supply Chains • Serve different functions • Efficient movement (F) • Market mediation (I) • Meet different criteria • Asset management (F) • Flexibility (I)

  3. Market Mediation Costs • Total Cost = Physical costs (production + transportation + inventory) + market mediation costs (stock-outs + markdowns) • Market mediation costs generally are negligible for functional products. Just create a schedule and freeze it or if competition is minimal, let customers wait • Market mediation costs can be very high for (truly) innovative products, but they might be worth it if profits are high enough. • Still, if market mediation costs can be reduced, profits can be even higher. Market mediation costs can be reduced by enhanced responsiveness.

  4. Enhancing Responsiveness • Reduce excessive and unnecessary variety • Buffer inventory of parts • Use leading indicators • Use common parts and postpone differentiation • Cut lead-times with lean manufacturing

  5. Matching Supply Chainswith Products Functional Products Innovative Products Efficient Supply Chain Match Mismatch Responsive Supply Chain Match Mismatch

  6. Campbell Soup • Continuous replenishment • Retailers inform Campbell via EDI every morning of their demand and inventory levels, then Campbell replenishes within agreed upper and lower inventory limits • Retailer’s inventories dropped by 50% • Campbell could forecast demand more accurately • No price promotions allowed • Campbell’s costs dropped and retailers sales rose (“win-win”)

  7. Mass Customization • National Bicycle • Found a profitable high margin segment: sports bikes • Customers can choose from two million options • Reliable two week delivery • Requires three times more labor than mass production • Lutron Electronics • High modularization of components • Software programming of lighting features • Flexible manufacturing

  8. Sport Obermeyer • Speculative production capacity vs reactive production capacity • Commit to half of production early in season via “Early Write” • Shorten lead-time (express mail for information, not products) • Risk-based production sequencing (what to make early or late in the season • “Accurate Response” - Forecast accuracy related to low variance among estimators • Cost of overproduction and underproduction was cut in half- and increased profits by 60%

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