By Daniel Stanton

A friend has a sign on her desk that reads “Good, Fast, Cheap … Pick Any Two.” The message is relevant for supply chain management because you often have to figure out what’s most important to you and be willing to compromise on the rest.

Step 1: Understand what customers value

To make good decisions about what to prioritize in a supply chain, start with your customers. Because the purpose of a supply chain is to deliver value to a customer, the first step in engineering and managing a supply chain is understanding exactly what your customers value. They may value having a wide selection of products to choose among, for example, or they might prefer to have a smaller number of options at a lower price. Alternatively, your customers may value having products available immediately for pickup, or they might prefer to have products delivered to their homes at a time that they choose.

The answers may be “all of the above,” but each of these choices creates different requirements for a supply chain, and they may be contradictory. It often helps to choose a particular customer, a key customer, and focus in on their specific preferences.

Some great techniques are available to help with identifying what customers value the most. One of the most popular is called quality functional design (QFD) or the house of quality (HOQ). The figure shows an example of a HOQ, which looks like a bunch of boxes with a roof on top. To build an HOQ, first you interview customers to determine which characteristics or features they value the most. Then, you match those features with your design to ensure that you’re focusing on delivering products and services that genuinely meet your customers’ needs.

supply-chain-hoq
Example of an HOQ.

Another common technique for determining customer preferences is called A-B Testing. To perform an A-B Test, you give your customer a choice between two options: Option A and Option B. Online shopping sites frequently use A-B Testing to see which products or ads are most attractive to customers, but A-B Testing can also be used in face-to-face experiments.

Step 2: Recognize your competitors

The next step in prioritizing your supply chain goals is recognizing your competitors. In the age of e-commerce, your competitors may not be who you think they are. Many traditional retail stores, for example, have been slow to realize that their most aggressive competitor is not another brick-and-mortar store, but a website: Amazon.com. Amazon.com isn’t competing only with retailers, however; it’s also competing with trucking companies, warehousing and distribution companies, and even technology companies such as Apple and Microsoft.

To understand who your real competitors are, you need to stop thinking about the product or service that you sell and start thinking about the problem that it solves. Dr. Clayton Christensen of Harvard Business School calls this approach to matching your product with a customer’s problem the Jobs to Be Done Theory. Think about what “job” your product or service does for your customers and what other products or services might be able to do that same job better, faster, or cheaper. These alternative products (or services) are your product’s real competitors, and you need to design and manage your supply chain so that your product can do that same job better than its competitors.

Step 3: Understand your products or services

The next step in prioritizing your supply chain goals is understanding the characteristics of your products or services. The easiest way to illustrate this step is to show how different kinds of products need to achieve different goals to deliver the greatest value to their customers.

The table describes supply chain priorities for different kinds of products. These examples are definitely not an exhaustive list of supply chains, but they illustrate why the supply chain for corn, for example, has different priorities from the supply chain for computers.

Supply Chain Priorities

Product Type Supply Chain Priorities
Commodities Low price, high availability, minimum quality standards
Luxury goods High quality, uniqueness
Fashion goods Fast throughput, low inventory, wide variety
Durable goods Balance between transportation/inventory cost and customer needs
Technology Speed, flexibility, security

Commodities

Commodities are things that are easy to find and easy to substitute. Common examples are food crops, metal ores, and gasoline. Because it’s so easy to substitute commodities from one supplier for commodities from another supplier, most people buy commodities wherever they can get what they need for the lowest price. Therefore, commodity supply chains need to have high availability, meet minimum quality standards, and be cheap.

Luxury goods

Luxury goods like high-end cars and jewelry are all about quality and variety. When customers are purchasing luxury goods, they want something in just the right size and color, and they don’t want everyone else to have the same item. Also, ensuring that luxury goods are free of defects and damage is essential. The supply chains for luxury goods need to accommodate a wide assortment of products with plenty of protection to keep them safe.

Fashion goods

Fashion goods like shoes and purses are all about selection and timing. Because styles change quickly, fashion supply chains need to transform ideas into products and get them sold to customers before the products become passé. Keeping the right amount of inventory is a delicate balance for fashion: If you don’t have products in stock, you can’t sell them. But if an item sits around in inventory for too long, it may fall out of style. Supply chains for fashion need to focus on speed and flexibility.

Durable goods

Durable goods, like household appliances, are heavy, and they need to last a long time. They’re also expensive, so they consume capital when they’re sitting in inventory. Making durable goods takes a long time, however, and customers usually don’t want to wait a long time for them. (If your refrigerator goes out, you want to have a new one delivered right away.) Durable goods can also face tough competition for pricing, and shipping big, heavy items can get expensive. Supply chains for durable goods need to balance the cost of keeping inventory available close to where the customers will want it with the cost of transporting the products and keeping them in inventory.

Technology

Technology products — such as computers, television sets, and electronics equipment — tend to be light and expensive. They also tend to become obsolete quickly. Technology products tend to be sensitive to moisture damage and are vulnerable to theft. Supply chains for technology products need to be fast, flexible, and secure.