Tuesday, February 4, 2014

Impact of New Product Design on Demand Forecasting and Supply Chains

The recommended readings for class focusing on Ikea’s compelling prices, Herman Miller’s sustainable products, Gordon Murray’s revolutionary concept cars or Tata Nano being available in an easy-to-assemble kit, drew attention to how innovative designing is the name in the game. These articles reflected how out-of-the-box designs can improve operational efficiency and environmental sustainability, and help companies save costs at the same time.

However, everything about design said and done, the issue that calls attention is how supply chains need to be optimized to accommodate for new product designs. This is possible only if supply chain planning forms an inherent part of product design.  Clearly, Ikea attacks this through its reverse strategy. By deciding on the materials and manufacturers even prior to designing a product, Ikea makes sure that its supply chain is well equipped to handle manufacturing of its atypical products, thus ensuring that its customers enjoy uninterrupted service. On the other hand, the Boeing 787 Dreamliner presents a classic case of how a supply chain, if not adjusted for an innovative product design, can cause irreversible damage to a company. The Dreamliner’s unusual design, and its equally unconventional supply chain did not make a good fit for each other, leading to delayed development. Following the series of delays, a number of customers cancelled their orders of the aircraft, with the biggest revocation priced at $8.5 billion coming from Qantas Airways Ltd. Consequently, Boeing Co. has suffered not just huge monetary losses, but a loss of goodwill and reputation as well.  

Demand forecasting and supply chain management are intrinsically correlated. For innovative products, the uncertainty in demand is inherent. Consider for example IBM’s Thinkpad with a cursor control in the middle of the keyboard. When the product was first introduced, its unfamiliarity led to the management not anticipating the demand correctly, resulting in the Thinkpad remaining in short supply for an entire year. However, in today’s time when the lead time for products has come down to only a few days, it is essential that supply chains are customized according to product demand. The following table illustrates a few demand unpredictability characteristics of innovative products as opposed to routine, functional products.

Source: http://www.computingscience.nl/docs/vakken/scm/Fisher.pdf

The Market-Mediation function of a supply chain, whose purpose is to determine if the variety of products reaching the marketplace is what the customers are willing to purchase, can help estimate demand better. Companies must spend significant resources on this function in order accurately forecast demand for new products. Hence, while for functional products, efficient supply chains are the best choice, a Market-Responsive supply chain is the more appropriate option. The following table highlights some of the characteristics of both of these types of supply chain configurations.

 Source: http://www.computingscience.nl/docs/vakken/scm/Fisher.pdf

However, the question that arises is that can Market- Responsive processes outweigh the benefits of an efficient supply chain. Is the return from new product designs high enough to compensate for the expenses that go into making the supply chain responsive?


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