In his Harvard Business Review 1997 article entitled “What Is the Right Supply Chain for Your Product?” Marshall L. Fisher distinguished two types of products that call for different supply chain strategies: functional and innovative. They differ as follows:
* Functional products, like canned soup and blue jeans, have longer life cycles (perhaps more than two years), relatively low contribution margins, and little variety. Because demand for them is stable, they are fairly easy to forecast, with a margin of error in the 10 percent range, very few out-of-stock situations, and no end-of-season markdowns.
* Innovative products differ from functional products in every aspect. They have unpredictable demand, relatively short life cycles (e.g., three months for seasonal clothing), and high contribution margins of 20 to 60 percent. They may have millions of variants in each category, an average stock-out rate from 10 to 40 percent, and end-of-season markdowns in the range of 10 to 25 percent of the regular price. The margin of error on forecasts for innovative products is as high as 40 to 100 percent, but the lead time to make them to order may be as low as one day and is generally no more than two weeks.
The idea that the same type of product can be either functional or innovative implies that one company might have more than one supply chain. And that’s the contention of Jonathan Byrnes, a professor at MIT. Writing in the Harvard Business School’s Working Knowledge 2005 article entitled “You Only Have One Supply Chain?”, Byrnes also asserts that one supply chain is not enough: two, three, or more would be preferable.
“One size fits all” supply chains may have been sufficient in the past, he believes, when that was the competitive norm, but modern IT makes it possible to have multiple, dynamic chains that can accommodate different product and information flows. Byrnes breaks apparel products into the following three categories: staples, seasonal products, and fashion. These products have very distinct design and replenishment characteristics.
Much like Fisher’s functional products, staples (e.g., white underwear) have steady, year-round demand and low margins. He advises stocking them only in retail outlets in small quantities and transporting them in truckload quantities (a full truck is more cost-effective for the shipper than a partially loaded vehicle, i.e. less-than-truckload [LTL] shipping.) Fashion products are like Fisher’s innovative items with unpredictable demand.
Consequently, Zara, the famous Spanish clothing manufacturer, has two supply chains, one for staples and the other for fashion clothing. To get the fastest response time, Zara uses pricey Western European suppliers for the fashion items. But for the more predictable demand items, it uses Eastern European suppliers, which have poorer response time (not a major concern here) but at much lower cost.
* Functional products, like canned soup and blue jeans, have longer life cycles (perhaps more than two years), relatively low contribution margins, and little variety. Because demand for them is stable, they are fairly easy to forecast, with a margin of error in the 10 percent range, very few out-of-stock situations, and no end-of-season markdowns.
* Innovative products differ from functional products in every aspect. They have unpredictable demand, relatively short life cycles (e.g., three months for seasonal clothing), and high contribution margins of 20 to 60 percent. They may have millions of variants in each category, an average stock-out rate from 10 to 40 percent, and end-of-season markdowns in the range of 10 to 25 percent of the regular price. The margin of error on forecasts for innovative products is as high as 40 to 100 percent, but the lead time to make them to order may be as low as one day and is generally no more than two weeks.
The idea that the same type of product can be either functional or innovative implies that one company might have more than one supply chain. And that’s the contention of Jonathan Byrnes, a professor at MIT. Writing in the Harvard Business School’s Working Knowledge 2005 article entitled “You Only Have One Supply Chain?”, Byrnes also asserts that one supply chain is not enough: two, three, or more would be preferable.
“One size fits all” supply chains may have been sufficient in the past, he believes, when that was the competitive norm, but modern IT makes it possible to have multiple, dynamic chains that can accommodate different product and information flows. Byrnes breaks apparel products into the following three categories: staples, seasonal products, and fashion. These products have very distinct design and replenishment characteristics.
Much like Fisher’s functional products, staples (e.g., white underwear) have steady, year-round demand and low margins. He advises stocking them only in retail outlets in small quantities and transporting them in truckload quantities (a full truck is more cost-effective for the shipper than a partially loaded vehicle, i.e. less-than-truckload [LTL] shipping.) Fashion products are like Fisher’s innovative items with unpredictable demand.
Consequently, Zara, the famous Spanish clothing manufacturer, has two supply chains, one for staples and the other for fashion clothing. To get the fastest response time, Zara uses pricey Western European suppliers for the fashion items. But for the more predictable demand items, it uses Eastern European suppliers, which have poorer response time (not a major concern here) but at much lower cost.
