A fundamental question in supply chain management is: ‘How should supply chains be managed when operations compete in different ways in different markets? ’ One answer, proposed by Professor Marshall Fisher of Wharton Business School, is to organize the supply chains serving those individual markets in different ways. He points out that many companies have seemingly similar products which, in fact, compete in different ways. Shoe manufacturers may produce classics which change little over the years, as well as fashions which last only one or two seasons.
Chocolate manufacturers have stable lines which have been sold for 50 years, but also product ‘specials’ associated with an event or film release, maybe selling only for a few months. Demand for the former products will be relatively stable and predictable, but demand for the latter will be far more uncertain. Also, the profit margin commanded by the innovative product will probably be higher than that of the more functional product. However, the price (and therefore the margin) of the innovative product may drop rapidly once it has become unfashionable in the market.
The supply chain policies which are seen to be appropriate for functional products and innovative products are termed by Fisher efficient supply chain policies and responsive supply chain policies, respectively. Efficient supply chain policies include keeping inventories low, especially in the downstream parts of the network, so as to maintain fast throughput and reduce the amount of working capital tied up in the inventory. What inventory there is in the network is concentrated mainly in the manufacturing operation, where it can keep utilization high and therefore manufacturing costs low.
Information must flow quickly up and down the chain from retail outlets back up to the manufacturer so that schedules can be given the maximum amount of time to adjust efficiently. The chain is then managed to make sure that products flow as quickly as possible down the chain to replenish what few stocks are kept downstream. By contrast, responsive supply chain policy stresses high service levels and responsive supply to the end-customer. The inventory in the network will be deployed as closely as possible to the customer.
In this way, the chain can still supply ven when dramatic changes occur in customer demand. Fast throughput from the upstream parts of the chain will still be needed to replenish downstream stocks. But those downstream stocks are needed to ensure high levels of availability to end-customers. The ‘bullwhip effect’, is used to describe how a small disturbance at the downstream end of a supply chain causes increasingly large disturbances, errors, inaccuracies and volatility as it works its way upstream. Its main cause is an understandable desire by the different links in the supply chain to manage their production rates and inventory levels sensibly.