What Is the Right Supply Chain Model for New Products?

A lot has to get done when it comes to launching a new product.  Aside from marketing and selling, enterprise executives need to know how much to make, how much to stock, and how they’ll spread that stock. 

If the new product is replacing an older one, the enterprise would need to figure out what to do with the older product’s inventories and its raw and packaging materials.  If the new product will involve purchase of new specialized manufacturing equipment, what will happen to the machines used for the older one? 

New products also would have new characteristics.  They may have more limited shelf lives.  They may use materials that require special handling. 

Many enterprise executives often plan very well the manufacturing and distribution of new products.  Many, however, don’t have immediate plans how to respond to the actual demand as soon as the new product is launched.  Higher than expected demand would wipe out inventories quickly and strain production and transportation capabilities.  Lower than expected demand would result in inventories occupying precious floor space and idle machines and workers costing the enterprise money. 

Every product has a life cycle.  A new product may start slow or move fast but would eventually reach a plateau and decline.  Some enterprises try to prolong the lives of their products especially if the products have profitable margins.  Enterprise executives, on the other hand, won’t hesitate replacing maturing products in exchange for potentially more beneficial ones. 


Joffrey Colignon & Joannes Vermorel, Product Life-Cyle (Supply Chain), April 2012, https://www.lokad.com/product-life-cycle-(inventory-planning)

Supply chain managers and engineers play a key role in the management of product life cycles.  And it starts not when a product is launched but before.  Many enterprise executives have the habit of telling supply chain managers to plan only when the product is just about to be introduced.  And when the demand becomes reality, more often than not it comes out much different than expected; the supply chain manager ends up scrambling for more materials, more storage space, more production capacity, or the opposite. 

Supply chain managers and engineers can contribute a great deal in the conception of a new product.  The supply chain engineer (SCE) in particular can compute estimated needed capacities for production, transportation and storage.  SCE’s can devise deployment plans and simulate various demand scenarios.  They can also work out the quality assurance protocols not only for manufacturing but also for procurement and logistics. 

In other words, SCE’s can develop a supply chain model for a new product.  It wouldn’t just be a production plan or a distribution plan.  It would be a comprehensive supply chain road-map that would synchronise the procurement of materials, production of goods, and inbound & outbound logistics.  Such a road-map would even cover after-sales services such as warranty responses and retrieval of damaged or rejected items. 

An enterprise would stand to benefit a great deal from a supply chain model for a new product.  It would offer the enterprise’s finance team a better forecast of cost and working capital and give enterprise executives a clear crystal ball of how a product would do once it is in the market. 

Making a supply chain model for a new product is not easy but it wouldn’t require re-invention. 

Hernán David Perez, supply chain professional and teacher, developed a “Supply Chain Roadmap” that would answer the question: “which supply chain strategy best fits my business?” (Hernán David Perez, “Supply Chain strategies: Which One Hits the Mark?”, CSSCMP’s Supply Chain Quarterly, https://www.supplychainquarterly.com/articles/720-supply-chain-strategies-which-one-hits-the-mark, 2013 March 06).

Mr. Perez outlined six (6) generic supply chain models enterprises can adopt depending on their industries and strategies.  The six (6) models consist of continuous-flow, efficient, fast, custom-configured, agile, and flexible.   Each has a different focus, from low-cost (efficient) to agile (responsive to uncertain demand).  An enterprise may adopt more than one model, i.e., it may use different models catering to different products or to specific areas of operations. 

The role of the SCE would be to find and propose the right model that would best fit an enterprise’s new product.  Mr. Perez’s six (6) models can be a reference for the SCE to tailor a model for the new product. 

Developing a supply chain model for a new product is similar to managing a project, such as construction of a building.  It starts with the design or what one wants the model to look like and function.  Next would be the detailed plans of the supporting structures such as materials requirements, transportation, storage & handling methods, work crews, procedures & standards, quality assurance methods, and equipment. 

Design and detailed plans are the end objectives, what we want the supply chain model to look like and how it will operate when the new product is launched.  To achieve the end objectives, the supply chain professionals would need to draft the road map, the series of activities to build the structures that make up the supply chain model.  It’s again similar to what project managers do:  a critical path schedule that includes a timeline and the timing of investments in resources.

Implementing a supply chain model involves a lot of uncertainty.  Demand, for starters, would be based on forecast and would no doubt come out much different than expected.  The model should take into account various scenarios.  To put it another way, the supply chain model should be ready to adapt.  It should be quick to react to fluctuating demand such as preparing a customer order & shipping system that quickly notifies supply chain planners to position inventories immediately where they’re needed. 

Costs, quality, and other issues would also likely crop up when a new product goes on line.  Some people would blame it on the “learning curve,” that period of getting accustomed to a new set of activities.  The longer the learning curve, however, the greater the expense and enterprises don’t want to spend too much time and capital for it.  The supply chain model, hence, should also be prepared for changing situations on the ground.  For example, the model should include training of machine operators and warehouse material handlers in regard to a new product’s characteristics and storage requirements.  The model may also include facility designs that allow swift change-overs between product variants (e.g. sizes, colours).

The ideal supply chain model is one that does not only cover for the introduction of a product but it’s future life cycle stages as well.  The supply chain model should incorporate monitoring systems that watch out for trends not only in demand but also in external factors such as commodity prices, freight rates, exchange rates, labour wages, taxes, and trade tariffs.  It should also watch out for disruptions and opportunities which it should be ready to respectively mitigate or take advantage of. 

It isn’t easy to launch a new product.  It’s not simply just having stock ready when it’s time to sell the product.  There are many things to consider if one wants to attain long-term success. 

Every product has its life-cycle.  One has to understand it and make a supply chain model for it in order to ensure its marketing success. 

The best kind of supply chain model is one that is ready to meet the challenges of inevitable change. 

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What is the Right Way to Serve Customers?

A manufacturer of metal parts hires a management consultant to help stimulate sales.  The consultant at once suggests the manufacturer prioritise production of its top twenty (20) best-selling items. 

The manufacturer thus makes one month’s worth of stock of each of the twenty (20) top-selling items.  Three (3) months later, the stock is hardly selling.  Meanwhile, customers complain that they haven’t received their shipments of items that are not on the top twenty (20) best-seller list.  Pending orders is equivalent to one (1) month’s average sales and the manufacturer simply has no stock to serve the orders. 

What happened? 

The management consultant had analysed the manufacturer’s sales history and listed the manufacturer’s top selling items based on their average sales value over the previous year.  The top twenty (20) items constituted 80% of the manufacturer’s sales that year.  It therefore seemed logical to have on stock those twenty (20) items.  It was easy to see that the top twenty (20) items have a high demand history. 

The manufacturer hired a supply chain engineer (SCE) to do something about the pending orders and out-of-stock problems.  The SCE analysed the manufacturer’s operations and observed that the manufacturer produced 1,800 individual items or stock-keeping units (SKU’s) in that same period of twelve (12) months.  Most of the customer orders the manufacturer received, however, were delivered late and many others were cancelled due to out-of-stock. 

The SCE noticed that the management consultant based his recommendation to produce the top twenty (20) selling items on the following analysis:

The SCE broke down the daily histories of the top selling 20 items and saw that each item had an erratic demand behaviour, in which for one (1) item, it looked like this:

Not one of the top twenty (20) items was selling at close to the overall average quantity at any day or even any week throughout the twelve (12) months surveyed.  Each item would experience very high demand in one or few orders but hardly would any item be selling close to average every day or every week.  The variance between average demand and each day’s demand over a year was very large. 

The manufacturer sold more than 1,800 unique items over a one (1) year period and most of each item’s sales were limited to one or two orders sometime during that same period.  Some items did have frequent daily sales but they were in small quantities.  The management consultant’s list of top twenty (20) did sell up to 80% of annual revenue but the manufacturer was losing potential sales from unserved orders of other items.   

The management consultant thought that producing and having stock of the top twenty (20) best-selling items would bring higher sales as based on historical numbers.  The consultant, however, didn’t see that customers didn’t need the said items every day.  A few customers with big projects bought large quantities of the top twenty (20) items in one or few orders. Other smaller scale customers ordered much fewer pieces of metal products at any one time and for certain items, more frequently.  The consultant didn’t realize that the manufacturer’s items were not needed every day, or even every year. Customers only bought for projects or for maintenance needs; items were only needed periodically.

Further studies by the SCE showed that some customers ordered each of the top twenty (20) items only once.  It would be a different customer ordering for a large quantity.  There was no uniform demand pattern.   Customers buying plenty of an item were probably buying for one-time projects.  Customers buying smaller quantities were buying for fewer requirements. 

And because they were for projects, customers would have unique specifications for the items they needed.  A customer’s order of an item was often different from that of another.  Some customers would want better finish on an item; other customers would deem the item’s finish as is as all right.  Even if basic specifications were consistent, it was commonplace for the manufacturer to do additional work on an item as per a customer’s request. 

The manufacturer therefore was really customising items more than making the same items over and over.  Sales orders very often had instructions for how products would be finished, cut, and packed.  Some customers required very tight specs, others did not.  Some customers wanted their items cut to certain sizes.  Some customers wanted more stringent packaging; some were satisfied without any packaging at all. 

The manufacturer’s order fulfilment system did not take into account these frequent instructions.  The information system had on file more than 10,000 items and it was found that many of the items were similar to each other.  In other words, every time a customer order was received, it asked for an item that was made before but with slightly different specifications.  The accounting and IT groups were constantly entering “new” items into the information system. 

The SCE therefore suggested that the manufacturer re-develop its customer service strategy.  The SCE suggested the manufacturer refocus the order fulfilment system from one that sells based on a fixed inventory of items to one that is based on customisation.  Instead of having a system like a grocery store, the system should be like a machine shop—i.e., only make an item when there’s an order.  The SCE also recommended that the manufacturer only keep stock of needed raw materials, not finished items. 

A large metal manufacturer a few kilometres away was actually doing that kind of thing.  His inventories of finished goods were limited to stocks that are about to be shipped.  He only kept at most a month’s worth of raw materials (he thought that already was too much) and he had no backlog of pending orders.  Every item that was made had its own unique identity unless it was a repeat order to the same customer. 

The SCE proposed a system in which the manufacturer’s sales representative would prepare quotations for customer inquiries.  When a customer is interested in an item, the sales representative would quote not only price and quantity but also confirm specifications and schedule of deliveries.  The sales representative would coordinate with a joint sales and supply chain support team that would translate customer inquiries into a quoted proposal for the customer.  The quoted proposal becomes a sales order upon negotiation and agreement between customer and sales rep. 

The supply chain team would keep stock of raw materials which happen to only number to less than twenty-five (25) items or stock-keeping units (SKU’s).  The stocking strategy would be independent of actual demand but would take into account large spikes as in when a customer conveys interest for a very large order.  Again, the sales and supply chain support team would ask the sales representative to negotiate delivery schedules to take into account the manufacturer’s capabilities to buy raw materials and produce the needed item. 

How demand is fulfilled varies from industry to industry, enterprise to enterprise.  One should study demand based on customer behaviour, not on overall totals or averages. 

One should also tailor the supply and fulfilment of demand to the needs of customers.  At the same time, one should always be aware of the system’s capabilities.  Customers may be always right but the enterprise is not one with unlimited power.  There has to be communication and collaboration via negotiation and mutually beneficial agreements that would address price, terms, and supply. 

There has to be a right way to serve an order.  Not for management, not for consultants.  But for customers. 

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