Essay About Supply Chain And Physical Costs

Supply Chain for Different Products
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The supply chain is a critical factor in a business’s profitability. There is a reason why the supermarket is never out of canned soup. As well as, one for an out of stock sticker on a new gadget. The product is why a supply chain exists.         Products differ, as so does their demands. There are two categories of products, functional and innovative. Functional products have low margins, and increased competition due to low entry barriers. The demand for functional products are predictable. On the other hand, innovative products have high margins and uncertain demand. In order to maximize profitability, these two categories deserve different supply chain strategies.        The supply chain has two functions, physical and market mediation. The physical costs cover what it takes to produce the product, and get it to the consumer. However, market mediation costs are due to the economics of supply and demand. This is challenging for innovative products. To lower the market mediation costs, early sales and market signal must be analyzed to adjust quickly. Therefore, suppliers should be chosen for speed and flexibility for an innovative product. Conversely, a physical cost efficient supplier should be chosen for a functional product to maximize profitability. An efficient supply chain is more consistent than the responsive supply chain. To manage a responsive supply chain, accepting uncertainty is the first step. Then, there is an option between reducing the uncertainty and avoiding it. Reducing uncertainty involves research and analyzing markets. Whereas, avoiding uncertainty can be achieved by cutting lead times and increasing the flexibility of the supply chain. Once uncertainty is reduced and avoided, the rest of the uncertainty can be hedged with inventory buffers. The energy put into finding the right supply chain for a product, is rewarded with the competitive advantage of service and increased profits.