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What is “functional product”, and what is “innovative product?” We can use the nature of product demand to classify whether a product is a functional product or an innovative product. With different product characters, supply chain management method that managers should choose will also be varied. Functional products are products that people buy in wide range of retail outlets, and those products have more stable and predictable demand, as well as long life cycles. For example, most of kitchen utensil can be classified as functional products, because it is relatively easier for a kitchen utensil firm to predict people’ total demand and the demand will not be fluctuated.
However, because of stable revenue flow that this demand nature provides, market competition is severe, which squeezes the profit margin of functional products. Since revenue is certainly fixed, minimizing physical cost becomes the priority for managers. Physically Efficient Process is a more preferable supply chain type for functional products, because it can supply predictable demand efficiently at the lowest possible cost.
Moreover, since functional products enjoys low forecasting errors, managers can freeze the production schedule and employ IT system, such as manufacturing-resource-planning software, to orchestrate the entire supply chain to minimize inventory and maximize production efficiency.
In contrast, innovative products have more fluctuated and unpredictable demand, and they have much shorter life cycle. Due to their unpredictable demand nature, which leads to less competition, innovative products are possible to create high profit margins. For instance, when iPad first debut, no any similar product existed in the market.
That is, if people want this innovative product, Apple is the only place they can get it. Apple therefore can enjoy a great profit in such less competition market. However, innovative products might also increase market mediation cost, such as markdowns or stock-outs, so Market-Responsive Process might be a more suitable supply chain management method for managers to use. Market-Responsive Process highly reduces lead-time and deploys excess buffer capacity and inventories, so it can respond quickly to unpredictable demand in order to reduce market mediation cost. Also, since innovative products have unpredictable demand and shorter life cycle, managers not only needs to consider supply chain side but also needs to focus on market respond when making decision.
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