Describe managerial levers to increase profitability within a supply chain

Question

What will be an ideal response?

Answer 1

Answer: Three managerial levers to increase profitability are:
1. Increasing the salvage value of each unit increases profitability (as well as the optimal cycle service level).
2. Decreasing the margin lost from a stockout increases profitability.
3. Reducing demand uncertainty.

One strategy to increase the salvage value of an unsold product would be selling unsold product to an outlet store.

Strategies to decrease the margin lost in a stockout include arranging for backup sourcing (that may be more expensive) so customers are not lost forever and purchasing product from a competitor on the open market.

As the ratio of the cost of overstocking to the cost of understocking gets smaller, the optimal level of product availability increases. This fact explains the difference in the level of product availability between a high-end store and a discount store. The high-end store has higher margins and thus a higher cost of understocking. It should thus provide a higher level of product availability than a discount store with lower margins, and as a result, a lower cost of stocking out.
The reduction of demand uncertainty is a significant managerial lever to improve supply chain profitability. With reduced demand uncertainty, a supply chain manager can better match supply and demand by reducing both overstocking and understocking. A manager can reduce demand uncertainty via the following means:

1. Improved forecasting: Use better market intelligence and collaboration to reduce demand uncertainty.
2. Quick response: Reduce replenishment lead time so that multiple orders may be placed in the selling season.
3. Postponement: In a multiproduct setting, postpone product differentiation until closer to the point of sale.
4. Tailored sourcing: Use a more expensive short lead time supplier as a backup for a low cost, long lead time supplier.