Supply Chain Management (3rd Edition)

Chapter 2 Supply Chain Performance: Achieving Strategic Fit and Scope

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Outline
Competitive and supply chain strategies Achieving strategic fit Expanding strategic scope

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What is Supply Chain Management?

Managing supply chain flows and assets, to maximize supply chain surplus What is supply chain surplus?

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Competitive and Supply Chain Strategies

Competitive strategy: defines the set of customer needs a firm seeks to satisfy through its products and services Product development strategy: specifies the portfolio of new products that the company will try to develop Marketing and sales strategy: specifies how the market will be segmented and product positioned, priced, and promoted Supply chain strategy:
determines the nature of material procurement, transportation of materials, manufacture of product or creation of service, distribution of product Consistency and support between supply chain strategy, competitive strategy, and other functional strategies is important
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Competitive and Supply Chain Strategies

Competitive strategy: defines the set of customer needs a firm seeks to satisfy through its products and services, relative to its competitors.
Wallmart low price, product availability MacMaster-Carr convenience, variety (400,000 products), responsiveness Dell Customization and variety

Priories of the customer is the determining factor in competitive strategy.

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Competitive and Supply Chain Strategies

Supply chain strategy:
Determines the nature of material procurement, transportation of materials, manufacture of product or creation of service, distribution of product. Determines the broad structure, what the proseses within company must focus to do well, and what roles each entity in the supply chain should play. Supply chain strategy is simply the collection of the strategies for new product development, marketing, operations, distributions, and service. Consistency and support between supply chain strategy, competitive strategy, and other functional strategies is important.
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Example; 7- Eleven Japan

A chain of small stores selling groceries and variety of products and services. Competitive strategy; convenience and easy access to stores, availability of variety of products and services (like bill payment). Supply chain strategy; emphasizing the convenience and variety in marketing, high density of stores, excellent information system, very responsive forecasting and inventory management system, flexible distribution system in delivery schedules.
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Example- Dell
Competitive strategy; Customization and variety at reasonable price. Supply chain strategy; broad structure-direct sale to customer, built-to-order system to achieve the customization and variety, using internet (or phone) and e-business for customization, no finished product inventory, low component inventories, close relations and information sharing with suppliers for speedy delivery and reduced defects, using parcel carriers for speedy delivery, a few assembly plants for economies of scale in production.
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Example Wall Mart

Competitive strategy; high availability of variety of reasonable quality products at low price. Supply chain strategy; frequent replenishment to stores, distribution depots close to store, uses its own fleet for transportation, cross docking strategy at depots, close collaboration and information sharing with its suppliers using their excellent information system.

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The Value Chain: Linking Supply Chain and Business Strategy

Finance, Accounting, Information Technology, Human Resources New Product Development Marketing and Operations Sales

Distribution

Service

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Achieving Strategic Fit

Introduction How is strategic fit achieved? Other issues affecting strategic fit

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Achieving Strategic Fit

Strategic fit:
Consistency between customer priorities of competitive strategy and supply chain capabilities specified by the supply chain strategy Competitive and supply chain strategies have the same goals

A company may fail because of a lack of strategic fit or because its processes and resources do not provide the capabilities to execute the desired strategy Example of strategic fit -- Dell
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Achieving Strategic Fit

Strategic fit:
Consistency between customer priorities of competitive strategy and supply chain capabilities specified by the supply chain strategy Competitive and supply chain strategies should have the same goals

All functional strategies that make up the supply chain strategy must be aligned A company may fail because of a lack of strategic fit or because its processes and resources do not provide the capabilities to execute the desired strategy
Example; Marketing is publicizing product variety and quick delivery while distribution is aiming for low cost means of transportation. (slow modes of transportation, order consolidations)
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DELL example for strategic fit

Competitive strategy; Customization and variety Supply chain strategy;
Two extreme options;
Efficient supply chain for low cost products (consolidated production and distribution, dedicated production capacity, limited variety, slow modes of distribution, standard products etc.) Responsive supply chain; Flexible production capacity, fast distribution options, product variety, designing easily customizable products with as many as possible common components)

Second option of course better fits with competitive strategy of Dell.

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How is Strategic Fit Achieved?

Step 1: Understanding the customer and supply chain uncertainty Step 2: Understanding the supply chain Step 3: Achieving strategic fit

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Step 1: Understanding the Customer and Supply Chain Uncertainty

Identify the needs of the customer segment being served
A customer who usually buys detergent from a convenience store (bakkal) v.s. A customer who goes to Metro and buy detergent in larger quantities at cheaper price? Emergency repair needs v.s. Construction related orders? What are the characteristics of these types of customers?

In general customer demand varies in the following attributes;

Quantity of product needed in each lot Response time customers will tolerate Variety of products needed Service level required Price of the product Desired rate of innovation in the product
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Step 1: Understanding the Customer and Supply Chain Uncertainty

We will try to combine all of these attributes in one metric; implied demand uncertainty
Demand uncertainty: uncertainty of customer demand for a product Implied demand uncertainty: resulting uncertainty for the supply chain given the portion of the demand the supply chain must handle and attributes the customer desires.

First step to strategic fit is to understand customers by mapping their demand on the implied uncertainty spectrum
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Step 1: Understanding the Customer and Supply Chain Uncertainty

Implied demand uncertainty also related to customer needs and product attributes Table 2.1 Figure 2.2 Table 2.2 First step to strategic fit is to understand customers by mapping their demand on the implied uncertainty spectrum

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Achieving Strategic Fit

Understanding the Customer
Lot size Response time Service level Product variety Price Innovation

Implied Demand Uncertainty

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Impact of Customer Needs on Implied Demand Uncertainty (Table 2.1)

Customer Need Range of quantity increases Lead time decreases Causes implied demand uncertainty to increase because Wider range of quantity implies greater variance in demand Less time to react to orders

Variety of products required increases Demand per product becomes more disaggregated

Number of channels increases

Rate of innovation increases Required service level increases

Total customer demand is now disaggregated over more channels

New products tend to have more uncertain demand Firm now has to handle unusual surges in demand
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Levels of Implied Demand Uncertainty

Predictable supply and demand Predictable supply and uncertain demand or uncertain supply and predictable demand or somewhat uncertain supply and demand Highly uncertain supply and demand

Salt at a supermarket

An existing automobile model

A new communication device

Figure 2.2: The Implied Uncertainty (Demand and Supply) Spectrum

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Correlation Between Implied Demand Uncertainty and Other Attributes (Table 2.2)
Attribute Product margin Low Implied Uncertainty Low High Implied Uncertainty High

Avg. forecast error

Avg. stockout rate

10%
1%-2%

40%-100%
10%-40%

Avg. forced season- 0% end markdown

10%-25%

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Correlation Between Implied Demand Uncertainty and Other Attributes

Examples;
Table salt v.s. A new mobile phone A mother board manufacturer serving both DELL (built-toorder) and a PC manufacturer who builds small variety of standard PCs,

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Step 2: Understanding the Supply Chain

How does the firm best meet demand? Dimension describing the supply chain is supply chain responsiveness Supply chain responsiveness -- ability to
respond to wide ranges of quantities demanded meet short lead times handle a large variety of products build highly innovative products meet a very high service level

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Step 2: Understanding the Supply Chain

There is a cost to achieving responsiveness Supply chain efficiency: cost of making and delivering the product to the customer Increasing responsiveness results in higher costs that lower efficiency Figure 2.3: cost-responsiveness efficient frontier Figure 2.4: supply chain responsiveness spectrum Second step to achieving strategic fit is to map the supply chain on the responsiveness spectrum
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Understanding the Supply Chain: CostResponsiveness Efficient Frontier

Responsiveness
High

Low

Cost
High
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Examples
Responsive supply chains;
7 Eleven- Japan; ,
variety of products; replenishes stores three times a day, with breakfast items, lunch items, and dinner items, provide different services. Short lead times; a store is replenished in less then 12 hours after the store manager gives an order.

Dell
Variety of products; customers designs their own PCs. Short lead times; uses parcel carriers for transportation to deliver a PC to the customer in a week on the average.

Efficient supply chain;

BM stores
Less workers at stores, less promotional costs, displaying products in boxes rather than stacking them on shelves, limited variety (about 600), reasonable quality products, stores not on main streets but in secondary places to keep the costs down.

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Responsiveness Spectrum (Figure 2.4)

Highly efficient Integrated steel mill Advance Production Schedules, Less variety and flexibilty

Somewhat efficient

Somewhat responsive

Highly responsive

Hanes Apparel Make to stock manufacurer with a lead time in weeks

Most automotive Production Variety of products delivered in weeks

Seven-Eleven Japan Variety of products by locaiton and by the time of the day, quick replenishments
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Step 3: Achieving Strategic Fit

Step is to ensure that what the supply chain does well (supply chain strategy) is consistent with target customers needs (competitive strategy) Fig. 2.5: Zone of strategic fit Examples:
Dell; High implied demand uncertainty and responsive supply chain Barilla (Italian pasta manufacturer); Low level of demand uncertainty and efficient supply chain

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Achieving Strategic Fit Shown on the Uncertainty/Responsiveness Map (Fig. 2.5)

Responsive supply chain

Responsiveness spectrum

Efficient supply chain Certain demand

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Implied uncertainty spectrum

Uncertain demand
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Step 3: Achieving Strategic Fit

In achieving strategic fit, different levels in the supply chain can be assigned different responsiveness and efficiency. Examples;
IKEA; Swedish furniture retailer
Targets customer who wants stylish furniture at reasonable price Limited variety to reduce the supply uncertainty Large stores where all styles are stocked and customer demand is satisfied from stocks. Stable and predictable orders to its manufacturers located in low-cost countries. Responsiveness provided by the stocks in store that absorbs the demand uncertainty. Manufacturers can be efficient because of stable and predictable

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Step 3: Achieving Strategic Fit

Example;
England Inc.; Furniture manufacturer in Tennessee England manufactures and delivers thousand of sofas and chairs to orders with three weeks lead time. Englands retailers let customer to select from variety of products with a promise of quick delivery. Retailers carry little inventory All the uncertainty is passed to England Inc. And Retailers can be efficient England Inc. can either hold high levels of raw material inventories to absorb the uncertainty and chose not to be efficient and allows its suppliers to be efficient, or passes all the uncertainty to its suppliers by holding low levels of raw materials and England itself works efficiently.

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Step 3: Achieving Strategic Fit

All functions in the value chain must support the competitive strategy to achieve strategic fit Fig. 2.7 Two extremes: Efficient supply chains (Barilla) and responsive supply chains (Dell) Table 2.3 Two key points
there is no right supply chain strategy independent of competitive strategy there is a right supply chain strategy for a given competitive strategy

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Comparison of Efficient and Responsive Supply Chains (Table 2.4)

Efficient
Primary goal Product design strategy Pricing strategy Mfg strategy Inventory strategy Lead time strategy Supplier selection strategy Transportation strategy Lowest cost Min product cost Lower margins High utilization Minimize inventory Reduce but not at expense of greater cost Cost and low quality Greater reliance on low cost modes

Responsive
Quick response Modularity to allow postponement Higher margins Capacity flexibility Buffer inventory Aggressively reduce even if costs are significant Speed, flexibility, quality Greater reliance on responsive (fast) modes
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Other Issues Affecting Strategic Fit

Multiple products and customer segments Product life cycle Competitive changes over time

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Multiple Products and Customer Segments

Firms sell different products to different customer segments (with different implied demand uncertainty)
A department store selling both ski jackets and sugar. A hard disc manufacturer producing for both DELL and Compact

The supply chain has to be able to balance efficiency and responsiveness given its portfolio of products and customer segments Two approaches: Different supply chains Tailor supply chain to best meet the needs of each products demand
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Multiple Products and Customer Segments

Firms sell different products to different customer segments (with different implied demand uncertainty) The supply chain has to be able to balance efficiency and responsiveness given its portfolio of products and customer segments Two approaches: Different supply chains Tailor supply chain to best meet the needs of each products demand
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Product Life Cycle

The demand characteristics of a product and the needs of a customer segment change as a product goes through its life cycle Supply chain strategy must evolve throughout the life cycle Early: uncertain demand, high margins (time is important), product availability is most important, responsiveness is key, cost is secondary Late: predictable demand, lower margins, price is important, efficiency becomes mor important.
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Product Life Cycle

The demand characteristics of a product and the needs of a customer segment change as a product goes through its life cycle Supply chain strategy must evolve throughout the life cycle Early: uncertain demand, high margins (time is important), product availability is most important, cost is secondary Late: predictable demand, lower margins, price is important
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Product Life Cycle

Examples: pharmaceutical firms, Intel As the product goes through the life cycle, the supply chain changes from one emphasizing responsiveness to one emphasizing efficiency

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Competitive Changes Over Time

Competitive pressures can change over time Mass customization; More competitors may result in an increased emphasis on variety at a reasonable price Cheap Chinese products, harder to compete The Internet makes it easier to offer a wide variety of products The supply chain must change to meet these changing competitive conditions

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Competitive Changes Over Time

Competitive pressures can change over time More competitors may result in an increased emphasis on variety at a reasonable price The Internet makes it easier to offer a wide variety of products The supply chain must change to meet these changing competitive conditions

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Expanding Strategic Scope

Scope of strategic fit
The functions and stages within a supply chain that devise an integrated strategy with a shared objective One extreme: each function at each stage develops its own strategy Other extreme: all functions in all stages devise a strategy jointly

Five categories:
Intracompany intraoperation scope Intracompany intrafunctional scope Intracompany interfunctional scope Intercompany interfunctional scope Flexible interfunctional scope

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Different Scopes of Strategic Fit Across a Supply Chain

Suppliers Manufacturer Distributor Competitive Strategy Product Development Strategy Supply Chain Strategy Marketing Strategy
Intercompany Interfunctional Intracompany Intrafunctional at Distributor Intracompany Intraoperation at Distributor

Retailer

Customer

Intracompany Interfunctional at Distributor

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Summary of Learning Objectives

Why is achieving strategic fit critical to a companys overall success? How does a company achieve strategic fit between its supply chain strategy and its competitive strategy? What is the importance of expanding the scope of strategic fit across the supply chain?

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