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 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 specific 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 is sues 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 first step in devising an effective supply chain strategy is therefore to consider the nature of the demand for the products one’s company supplies. Many aspects are important – for example, product life cycle, demand predictability, product variety, and market standards for lead times and service (the percentage of demand filled from in stock goods). But I have found that if one classifies 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.