Quest Gateway to Logistics Excellence
uarterly
Feb-Apr 2010
Supply Chain
Megatrends 2010-11
Knowledge Partner
global Supply chain M Shift from Customer Service to Relationship Management
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While traditional customer service focuses on achieving internal operating standards, a truly relationship-driven supply chain focuses on establishing customer success...
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Forecast to Endcast Management often lets forecasting bumble along unsupported in the hope everything will come out all right in the end....
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Experience to Transition Strategy Firms increasingly confront the need to reinvent processes that are performing adequately when assessed historically, but in fact....
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Experience to Transition Strategy While departments may remain the preferred method of managing work, the reality is that process-oriented, self-directed....
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Collaborative Approach The notion of focused collaborative arrangements, coupled with true cradle to grave accountability, is revolutionizing the way that....
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Vertical to Virtual Integration Virtually integrating operations with material and service suppliers to form a seamless flow of internal and external work overcomes the financial barriers....
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Trust the expertise Melvis Furtado 3PL is a two-way traffic where the firms have to be a good listener and always evaluate what best their partner can do and what constraints he has. 3PL provides Service not just ....
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Supply Chain Opti-Simulation Unwired Tolga Yanasik Simulation is often regarded as the proper means for supporting decision making on supply chain design. Owing to its inherent modeling flexibility, simulation is often regarded as the proper means for....
CONT
Mega Trends 2010-2011
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Absolute to Relative Value The notion of relative value is to grow a larger share of the profitable revenue available in a business arrangement by a willingness to perform a broader range....
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Information Hoarding to Sharing Given the right information-enabling technology and leadership, decision-makers can become performance managers....
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Training to Knowledge-Based Learning Implementing knowledge-based learning to effectively train employees is becoming critical.....
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Reinventing Managerial Accounting to Value-Based Management Value management is appropriately viewed as the implementation of financial sophistication. The key is to identify and support activities that create value as contrasted to....
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Supply Chain design and analytics Changing scenario of Supply Chain is forcing companies to redesign their supply chain model to keep pace with the market....
“Approach RTC while cutting cost� Thibault Quiviger
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Redesign To Cost (RTC), a very efficient Cost Cutting Approach consisting of reveiwing the very detailed design and specifications of the product, can save 1535 % of your total cost.....
Back to Old Nightmares : Mastering Time Yan Lehunchec
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This new paradigm is shifting the center of the industrial organization from the plant to the management of supplies and dispatch....
Corollary of Supply Chain Analytics Unnikrishnan Some companies, whose Supply Chain excellence has been recognized, have been investing in Supply Chain analytical team for years
TENTS
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Quest
uarterly Feb-Apr 2010
Editorial Head Apresh C Mishra apresh@log4scm.com editor@log4scm.com +91 99105 16905 Intellect Head Rajeev R Mishra rajeev@log4scm.com intellect@log4scm.com +91 99711 74574 Marketing and Operations Head Shatrunkay Singh shatrunjay@log4scm.com marketing@log4scm.com Communications Partner Renaissance PR Knowledge Partner Enetek S.A.R.L. Disclaimer All the information in this magazine has been provided with due care. However neither Uvaach Media nor its any partner guarantee for the appropriateness of the information. Kindly check properly before acting according to the information we have provided here. All the matters contained here are under the intellectual property right of Uvaach Media that prohibits the user from copying or reproducing the matter in any form without the prior written permission of Uvaach Media.
Editorial
Let’s hope for the best
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or the last couple of years Supply Chain has matured so have its complexities. Considered often as a soft skill, Supply Chain management, on the contrary, is an engineering activity, as much as manufacturing or IT development. This activity requires not only extensive training and skilled people to be carried out efficiently but also trust among the different partners in the chain. That’s the most difficult aspect of Supply Chain management: partners need to trust each others, to share data or even invest in common systems. This trust issue is often the foot trap which blocks, for instance, the development of 3rd PL. 3rd PL need to invest in heavy IT system interconnected with their customer’s systems to provide up to date services but contracts are challenged every 2 years. This is far shorter than the breakeven point, impeding the development of long and fruitful relationship between 3rd PL and orders givers. There are several aspects of supply chain interaction that have been identified in supply chain trends over the last few decades. The mega-trends reflect fundamental paradigm shifts exhibited by leading firms as they transform their supply chain capabilities to accommodate the long-term transition from an industrial to an Scientific Technology driven society. These mega-trends imply substantial change in logistics practices between supply chain partners as they struggle to establish efficient, effective, and relevant product/service solutions for end-customers. The mega-trends discussed in this paper identify some critical dimensions of change relevant to supply chain value creation. Well, we have tried to create an enabling environment for the supply chain sector so as to equip supply chain strategists with the changing market trends which could affect them in future. Moreover supply chain is considered secondary focus. We hope Log4scm Quest will create value addition in bringing supply chain in centre stage in companies’ strategic business planning. We would be glad to hear from you Happy reading!! apresh@log4sm.com, editor@log4scm.com +91 99105 168905 Feb-April 2010 Log4scm Quest 05
Cover Story
Global Supply Chain
Mega Trends 2010-2011
06 Log4scm Quest Feb-April 2010
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raditionally, supply chains created value through low price and broad product assortment. Today, however, supply chain managers are learning how to accommodate customers who demand greater control of the buying process, have the financial ability to make choices, and are willing to utilize a variety of ways to purchase goods and services to satisfy their
customers will increasingly define value in the context of a technology driven competitive environment is critical to supply chain success. There are several aspect of supply chain interaction that has been identified in supply chain trends over
t h e last few decade. The megatrends reflect fundamental paradigm shifts exhibited by leading firms as they transform their supply chain capabilities to accommodate the long-term transition from an industrial to an Scientific Technology driven society. These mega-trends imply substantial change in logistics practices between supply chain partners as they struggle to establish efficient, effective, and relevant product/service solutions for end-customers. The mega-trends discussed in this paper identify some critical dimensions of change relevant to supply chain value creation.
lifestyle requirements. Unfortunately, as firms struggle to implement best practices to solve today's problems, the environment in and around the firm is changing. If a firm does not have the capability and inclination to change, it may find itself in the position of doing things extremely well that no one values. The goal of integrated supply Once a product is scanned at a chain is to enhance end-customer value, Understanding that end- retail store, a natural delay occurs in the transmittal of the signal
that triggers a replenishment event to t a k e
place. D e l ay s occur for a number of reasons, and the longer the delay, the greater the uncertainty upstream supply chain partners experience. That uncertainty translates into those partners taking measures to guard against stock outages, in the form of larger safety stocks. As that demand signal, and its delay, moves further away from its source, the larger the amplitude, or uncertainty becomes. That uncertainty impacts planning cycles, and their lead times, within and between the supply chain partners. In this way, distance and time become more and more critical to building an effective and efficient supply chain. In addition, there are compounding factors that occur due to the nature of that initial demand signal the supply chain receives. The circumstances that cause a consumer to walk into a specific store and purchase a particular SKU are of interest in understanding supply chains. It could just be the normal weekly shopping run, which results in a Feb-April 2010 Log4scm Quest 07
Cover Story
The location and amount of inventories and production capability plays a direct impact on the ability to respond to these types of supply chain demand creating events, further leading to improving our understanding of how physical location and work processes are inherently linked in efficient supply chain design.
demand signal that is relatively easy to predict and manage. Problems arise when product promotions take place. The consumer might have made a purchase because of a coupon event, a store ad placed in a local paper, or via an in-store event. These events can cause disruptions in the supply chain, and far too frequently are mis-communicated to the supply chain partners. New product initiatives are another form of disruption in the supply chain. A new initiative,perhaps a new product, or variation on an existing product, requires decisions on pre-launch production timing, and pre-building and staging inventory to meet anticipated demand for the products. The location and amount of inventories and production capability plays a direct impact on the ability to respond to these types of supply chain demand-creating events, further leading to improving our understanding of how physical location and work processes are inherently linked in efficient supply chain design. And while these problems exist in scale in the different parts of the World, they are further exacerbated when dealing with international trade.
were managed, and how effective the resulting processes were in achieving the objectives, was partially dependent on where and how inventory was physically deployed in the network. This led us to support the development of a dynamic simulation model to adequately represent the processing of a supply chain’s work processes and operating policies against the supply chain’s primary driver: demand. This leads to an important point: If a supply chain’s designing incorporates not only questions as to Where and how many stacks of inventory?, but also of work process like inventory deployment, replenishment policies, operating policies, the two issues are inherently linked and must be solved together. As we investigated different operating policies within the warehouse structure proposed by the optimization models, we found that in certain instances that we would not be able to achieve the service levels we had intended. This learning from the simulation modeling fed back into the optimization model, in terms of new constraints required to determine a feasible warehousing structure. That, in turn, created a new scenario to test within the simulation environment. In the course of the work, we realized that an easier process to move back and forth between the two technologies would be useful.
The ENETEK Analytics group was asked to develop a traditional distribution network design model, utilizing mathematical optimization methods, to suggest a potential layout of warehousing required to meet this need. To accomplish this, Let’s consider the different situawork processes and policies would tions here below : need to be substantially changed. A steel maker is designing its 5 How successfully those changes years investment plan. It must de08 Log4scm Quest Feb-April 2010
cide where to invest, which production line to revamp, which production capacity to squeeze down across 27 plants in Europe. Its product portfolio is made of 16,000 different products and many of them are processed on different production lines in different countries. The team in charge of this process is also concerned by the effect of different price policies contemplated for the different product and how this could modify their investment plan.
2. Where to locate the dif- EOM will decide if it must be ferent Distribution Centers built on stock or on demand, im(DCs) plying very different industrial or3. How much stock will be ganization scheme : demand necessary to guarantee 95% serv- forecast, supplier contracting, ice level to every customer with a production allocation, capacity delivery lead time of X days (X to management‌ Then, once decided which car to build on stock optimize) versus on demand, the OEM 4. Out of the total stock, must decide through which DC how much will be safety stock sending this car in order to guarthat is to say dead stock. antee that it will reach the cusThese questions must be con- tomer in less than X days after sidered as a single problem which this customer passed his order. It must be handled by the OEM. Or is easy to understand that both its 3rd PL suppliers. Indeed, since the distribution and the producmore and more 3PLs tend to tion are intrinsically linked when manage the distribution network, deciding which marketing offer they should propose added value about delivery lead time to desolutions to the OEM by study- sign. Let alone considering the ing in depth these questions with product mix which is per se a their customers. Nonetheless, as challenge.
A car maker is willing to re engineer its distribution chain in Europe to build a competitive advantage against its competitors in a context of over production over capacities, long delivery lead times and over stock scattered in the different European countries. The difficulty for this EOM can it is easy to understand, these be summarized by the following questions, which at first sight different questions: seem to be pure distribution is1. Which product must be sues, go very deep in the OEM built on demand, which must be organization and its production built on stock strategy. For each car model, the
since more and more 3PLs tend to manage the distribution network, they should propose added value solutions to the OEM by studying in depth these questions with their customers. Nonetheless, as it is easy to understand, these questions, which at ďŹ rst sight seem to be pure distribution issues, go very deep in the OEM organization and its production
A port authority is willing to build a new container terminal. It must decide about the new layout of the terminal, the number of cranes, the size of the parking lot for the waiting trucks, the number and location of weigh bridges and, most important, the number and lay-out of the customs gate it must start negotiate with the government. In this article, we will consider the scientific approach which can be implemented to answer these technical questions and beyond, explain the tools and methodologies and Mega Trends Feb-April 2010 Log4scm Quest 09
Cover Story
Megatrend-1 Shift from Customer Service to Relationship Management
Relationship does matter While traditional customer service focuses on achieving internal operating standards, a truly relationship-driven supply chain focuses on establishing customer success. For many customers, such operating features as cycle time compression, exact point in time delivery performance and perfect order-to-delivery may be the prime drivers of supplier acceptability.
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ustomer Focus and Superior Service should be a major objective for every manufacturing company in order to either achieve or maintain marketplace leadership. Customer relevancy will increasingly become the key strategic commitment of leading corporations. While traditional customer service focuses on achieving internal operating standards, a truly relationship-driven supply chain focuses on establishing customer success. For many customers, such operating features as cycle time compression, exact point in time delivery performance 10 Log4scm Quest Feb-April 2010
and perfect order-to-delivery may be the prime drivers of supplier acceptability. In contrast, other customers may not be willing to shoulder the cost of day-to-day six-sigma logistics support. Their preference may be for a high level of average logistical support fortified by immaculate logistical recovery when and where needed. Supply chains designed to achieve unique customer value propositions have the potential to turn commodities into value-added solutions. Given an understanding of what drives end-customer pur-
chase behavior, a supply chain based on relationships has the greatest potential to result in unique logistical solutions that are simultaneously effective, efficient and relevant. This implies that firms will likely participate in multiple supply chains to support different customers. Although most firms have not achieved the desired level of closeness with customers, it is the most advanced of the mega trends. We assess the current average achievement to be 5-6 on the ten-point scale. Leading firms increasingly recognize that success hinges on establishing intimate relationships with key customers. Intimate relationships enable firms to generate unique and profitable product/service offerings for their preferred customers. This, of course, is in direct contrast to principles of mass marketing, and it is certainly cost prohibitive to all but the most narrowly defined market niche firms. Managers seeking to achieve this level of intimacy with customers must assess their
firm's resources relative to the needs and desires of select individual customers. Then the firm can deploy its resources and capabilities to perform customervalued activities and services that competitors cannot match at all or at a reasonable cost. There are two shifts that must take place for firms to evolve along this continuum. First, firms seeking to develop strong customer relationships should recognize that all customers do not have the same service expectations and do not necessarily want or deserve the same overall level of service. They must, therefore, identify core customers best suited to be their business clients and then meet or exceed expectations by providing unique valueadded services. These services may include assignment of specific focus teams to identify, design, implement, and refine specialized and synchronized offerings. Additionally, firms must develop the ability to satisfy not only existing needs but also those that may emerge. By continuously
Although most ďŹ rms have not achieved the desired level of closeness with customers, it is the most advanced of the mega trends. We assess the current average achievement to be 5-6 on the ten-point scale. Leading ďŹ rms increasingly recognize that success hinges on establishing intimate relationships with key customers.
matching service capabilities with changing customer expectations, providers can stay ahead of competition. Second, firms seeking to enhance customer relationships must develop operating systems capable of quickly reacting to change rather than depending upon anticipatory deployment of inventory to handle planned requirements. This is facilitated by gathering and exchanging information throughout the supply chain as contrasted to guessing what may happen. The focus must be on efficient and effective accommodation of unique customer requests as well as on the ability to react to unexpected operational circumstances. These capabilities enable firms to capitalize on uncertainty to enhance customer satisfaction. Some approaches that facilitate flexibility include providing frontline employees with the authority to approve special customer requests, automatically accommodating stock outs through multiple service locations, and implementing preplanned solutions. Another critical enabler of flexibility is routinization and simplification of fundamental work to minimize effort expended on handling day-to-day details and free resources to deal with unexpected events. Judicious employment of form and time postponement also contributes to a firm's ability to respond to unknown or unplanned circumstances. Feb-April 2010 Log4scm Quest 11
Cover Story
Megatrend-2 Forecast to Endcast
Predicting the unpredictable Management often lets forecasting bumble along unsupported in the hope everything will come out all right in the end. This approach can only contribute to repeating cycles of poor performance.
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ts difficult to forecast our business, it’s too unpredictable. The fact is, when inventory exists at any level in anticipation of customer orders, it is the result of a forecast. Someone, somewhere in the organization has made predictions that have activated capacity, consumed cash and driven the customer service level. Also, it’s a good bet that the someone who’s forecasting is doing it without the right tools, without proper training, and with little or no information to support the process. Yet, the forecast drives material planning, production 12 Log4scm Quest Feb-April 2010
scheduling, inventory levels, and customer service (among other things). Managers know this, in their hearts, but for some unknown reason they insist that “we can’t forecast this business”. The result is that management often lets forecasting bumble along unsupported in the hope everything will come out all right in the end. This approach can only contribute to repeating cycles of poor performance. Experience demonstrates that the consequence of bad forecasting is a significant and unfavorable impact on overall business per-
formance. To make matters worse, a form of denial sets in and the real costs of poor forecasting are consistently underestimated and often overlooked. When “bad numbers” drive material planning and production schedules, the inevitable results are longer cycle times, higher overhead activity costs, erratic production schedule performance, excessive inventory, lower throughput, and lots of dissatisfied customers – eventually having a negative impact on sales. The cost of bad forecasting is enormous. Forecasting deserves increased recognition of that importance and must become one of the most critical management functions. As such, improving the forecasting process deserves the small investment required to achieve incredible returns on that investment.
service objectives are the actual results being realized.
the test could be the differing answers various managers will give the same questions. This, of course, opens up an entire area for discussion (spirited discussion in many cases) which should be the beginning of swift problem resolution.
• Short-term forecast deviations are monitored and adjusted and long-term forecast accuracy is continuously improving.
Answer “Yes” or “No” to each of the following:
• Inventory record accuracy is maintained at 98+%.
• Excess safety stock • Order fill rates meet management’s specific and measured buffers are not pyramidally maintained at various inventory levels customer service strategy. to compensate for “bad num• Delivery lead-times are at bers”. least competitive and predictable. • Excess and obsolete in• All functions agree on ventories are measured and are which products are stocked and less than 1% of total inventory. which are made to order. What to do further? • The mix and investment For those who do not score well in inventory are a shared respon- on the Self-Diagnostics test sibility between Sales and Manu- above, appropriate action is definitely required. facturing. First, management must formally recognize sales forecasting as a vital business control point.
• Appropriate mathematical and statistical calculations are The following ten point check- used instead of “rules of thumb” list is a simple self-diagnostic to establish desired mix and levwhich can help companies envi- els. sion what performance could be. • Management’s inventory Another enlightening aspect from investment plan and customer
Second, this recognition should be followed by a thorough evaluation of the current forecasting process. Third, where needed, an action plan for improvement should be launched without delay.
Forecasting deserves increased recognition of that importance and must become one of the most critical management functions. As such, improving the forecasting process deserves the small investment required to achieve incredible returns on that investment.
The good news is getting a forecasting process in place is not as difficult as many people think; statistical forecasting tools are readily available and the procedural requirements are modest. If you have to forecast, then the only proper course is do it with the right tools, techniques, information and properly trained staff. Then, and only then, will you be able to say “we can forecast our business.”
The Self-Diagnostics Checklist
Feb-April 2010 Log4scm Quest 13
Invited
Mr.Thibault, an Ex-Army Officer from the French Army and Prior to setting his company in 2004, worked primarily in Arcelor (now Arcelor-Mittal) and he worked in various capacities from Quality Division and then went on to Supply Chain and Network Design, and later on for different industries, from heavy industry companies –Steel & Mining, Oil & Gas to Retail businesses, specializing in re engineering their Distribution Networks, Investment Planning and Production Allocation and also developing Quality Model Builder based on Machine Learning Algorithms and then Supply Chain Modeller for the European industry. He founded his own firm and expanded his company expertise to Operations Simulation and Operation Excellence with 2 new Regional offices in India and Turkey. In early 2009, he has been appointed Associate Professor at the Technical University of Compiègne, France for Industrial Network Design for the Mechanical Engineering Department. You can reach to him at thibault.quiviger@enetek.eu 50 Log4scm Quest Feb-April 2010
“Approach RTC while cutting cost” Redesign To Cost (RTC), a very efficient Cost Cutting Approach consisting of reveiwing the very detailed design and specifications of the product, can save 15-35 % of your total cost. Mr. Thibault Quiviger shares his ideas how to go for it with Log4scm. How to cut cost? There are basically 3 ways to cut costs: transfer the problem to your supplier and get better prices, be more efficient in your Supply Chain –stock reduction, new distribution networks, better use of assets, minimize losses (time, material) and a 3rd one not explored often, review your product offer through a Redesign To Cost ap-
ranging respectively in 3-5%, 2-10% and 15-35% of the total cost. Let’s see what more Mr. Thibault says in an exclussive interview with Log4scm. What is RTC? Redesign To Cost is a very efficient Cost Cutting Approach consisting of reviewing the very detailed design and specifica-
proach (RTC). These 3 different ap- tions of the products to relax proaches bring in general savings the too constraining ones and in
optimizing the product range functionalities not valued by the customers. And because design offer. Engineers like complexity, they How can RTC be compared to will tend to propose complex deother Cost Reduction Apsigns or complex manufacturing proaches? processes, regardless of their Indeed, our experience in Eu- cost. Most engineers prefer derope has shown that 85% of the signing their own system than re product cost is frozen during the using an existing system proved design phase. The so efficient and reliable or produced in such popular lean approahces,6 sigmas quantities that its unit cost will be and network design projects act- always much smaller than any ing only on less than 15% of the new system designed from product cost. Indeed, during the scratch. design phase, the focus is much more centered on fulfilling spe- Which are the potential costs cific marketing requirement than to be cut? optimizing the total cost (sourcSources of cost easy to cut are ing + manufacturing + distribu- plethoric: choice of materials tion). Marketing requirements are (plastic vs steel, steel grade, thickoften too stringent, asking for ness), the shape of the product
Outsourcing is a viable option / solution to most companies. Why do companies outsource has various reasons. Some increase shareholder value, reduce costs, business transformation, improve operations, overcome lack of internal capabilities, keep up with competitors, gain competitive advantage, improve capabilities, increase sales, improve service, reduce inventory, increase inventory velocity and turns, mitigate capital investment, improve cash flow, turn fixed costs into variable costs and other benefits, both tangible and intangible.
(so easy to draw complex but costly to produce shapes with CAD software today), tolerances (too narrow tolerances = very high production costs) or functionalities not valued by the customers or by the targeted customer segment (is a camera necessary on any cell phone?). Reviewing specifications and secondary functions on products lead to an average savings of 30% on the unit prices while guaranteeing the same level of customer satisfaction. But beyond the product specifications, What could be the effects of Product Range on RTC ? It is necessary to consider the product range to optimize the trade-off between product diversity aimed at satisfying the identified distinct customer clusters and the induced production/sourcing complexity in the Supply Chain. For instance, a car maker realized that its AC system power was 30% higher compared to its peers. Aligning specs led to a 25% cost reduction on the AC system. A payment terminal producer reduced the resolution of its printer head from 8 dots/mm to 4 Feb-April 2010 Log4scm Quest 51
Invited The first problem of over customization is often found in many industries in their infancy stage, the “platform” strategy pushed too far is every day more common in the industries which understood the risks of over customization. The right balance is in between: defining the right number of “generic” platform enabling economies of scale and differentiating enough the product features to fit the market needs at the cheapest cost for every customer segment identified. 52 Log4scm Quest Feb-April 2010
dots/mm, reducing cost of the equipment by 21%. A small car maker replaced its in house developed breaking system and re used the system of a competitor: cost reduction of 48%. For sure, all these action require intensive analysis of the specifications, of the suppliers offer and potential sourcing diversification while meeting customer needs (and not design engineer pride)
is every day more common in the industries which understood the risks of over customization. The right balance is in between: defining the right number of “generic” platform enabling economies of scale and differentiating enough the product features to fit the market needs at the cheapest cost for every customer segment identified. Could you elaborate it with an example?
Do Marketing Heads need to For example, proposing an inteOptimize Product Diversity? grated camera for the low range cell Marketing teams tend to define phones in India has been rejected distinct specifications for the differ- by Nokia because most people ent customer clusters and customer would not pay for it, too expensive needs they have identified. Tempta- while it has been generalized in Europe to achieve economies of scale tion is high then to customize each pushing costs down cost enough to and every product for every cuspropose it for every European customer. But mass customization is tomer. extremely complex and often exA harness makers split its single tremely costly. Basically, customers prefer a full option car than a car harness offer between high and with the limited options they could middle range customer to build them with cheaper components for afford! This reality can lead engithe middle range: savings achieved neers to the opposite direction, over = 21%... simplifying the product offer These examples show that the aligned on the most demanding product range optimization requires customer needs, generalizing every a systematic and quantified pros option for every customer. Leading and cons approach to achieve the to expensive production costs. If best trade-off between cheapest the first problem of over cus- cost and Supply Chain complexity tomization is often found in many management costs. Send your comments to: industries in their infancy stage, the review@log4scm.com “platform” strategy pushed too far
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