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Strategic Fit and Supply Chain

Integration

Dr. R K Singh

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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


Marketing and sales strategy
Supply chain strategy:

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The Value Chain: Linking Supply Chain and


Business Strategy

Business Strategy
New Product Marketing
Strategy
Strategy

New
Product
Development

Supply Chain Strategy

Marketing
and
Operations Distribution Service
Sales

Finance, Accounting, Information Technology, Human Resources


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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

Example of strategic fit -- 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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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
Customer Need

Causes implied demand


uncertainty to increase because

Range of quantity increases

Wider range of quantity implies


greater variance in demand

Lead time decreases

Less time to react to orders

Variety of products required


increases

Demand per product becomes more


disaggregated

Number of channels increases

Total customer demand is now


disaggregated over more channels

Rate of innovation increases

New products tend to have more


uncertain demand

Required service level


increases

Firm now has to handle unusual


surges in demand
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Levels of Implied Demand


Uncertainty
Detergent
Long lead time steel
Purely functional products

High Fashion
Palm top computer
Entirely new products

Customer Need
Price

Responsiveness

Low

High

Implied Demand Uncertainty


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Correlation Between Implied Demand


Uncertainty and Other Attributes
Attribute
Product margin

Low Implied
Uncertainty
Low

High Implied
Uncertainty
High

Avg. forecast error

10%

40%-100%

Avg. stockout rate

1%-2%

10%-40%

Avg. forced season- 0%


end markdown

10%-25%

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Step 2: Understanding the


Supply Chain
How does the firm best meet demand?
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
Handle supply uncertainty

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Understanding the Supply Chain: CostResponsiveness Efficient Frontier


Responsiveness
High

Low

Cost
High

Low
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Step 3: Achieving Strategic Fit

Step is to ensure that what the supply


chain does well is consistent with target
customers needs

Examples: Dell, Barilla

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Responsiveness Spectrum

Highly
efficient

Integrated
steel mill

Somewhat
efficient

Hanes
apparel

Somewhat
responsive

Most
automotive
production

Highly
responsive

Dell

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Step 3: Achieving Strategic Fit

All functions in the value chain must support


the competitive strategy

Two extremes: Efficient supply chains (Salt)


and responsive supply chains (Dell)

There is no right supply chain strategy


independent of competitive strategy

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Achieving Strategic Fit Shown on the


Uncertainty/Responsiveness Map
Responsive
supply chain

Responsiven
ess spectrum

Efficient
supply chain

Certain
demand

Implied
uncertainty
spectrum

Uncertain
demand
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Comparison of Efficient and Responsive


Supply Chains
Efficient

Responsive

Primary goal

Lowest cost

Quick response

Product design
strategy

Min product cost

Modularity to allow
postponement

Pricing strategy

Lower margins

Higher margins

Mfg strategy

High utilization

Capacity flexibility

Inventory strategy

Minimize inventory

Buffer inventory

Lead time strategy

Reduce but not at expense


of greater cost

Aggressively reduce even


if costs are significant

Supplier selection
strategy

Cost and low quality

Speed, flexibility, quality

Transportation
strategy

Greater reliance on low


cost modes

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)
The supply chain has to be able to
balance efficiency and responsiveness
Two approaches:

Different supply chains


Tailor supply chain to best meet the needs of
each products demand

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Products Life Cycle


Introduction
Best period to
increase market
share
R&D engineering
critical

Growth
Practical to
change price
or quality
image
Strengthen
niche

Maturity
Poor time to
change image,
price or quality
Competitive costs
become critical
Defend market
position

Decline
Cost control
critical

Sales

Time

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SC Strategy during Product Life cycle


The demand characteristics of a product
change as a product goes through its 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
Examples: pharmaceutical firms, Intel

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Changes in Supply Chain strategy over a


Product life cycle
Responsive
supply chain

Responsiven
ess spectrum

Efficient
supply chain

Product
Maturity

Implied
uncertainty
spectrum

Product
introduction
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Competitive Changes Over


Time

Competitive pressures can change over time

Increased emphasis on variety at a reasonable


price

The Internet makes it easier to offer a wide


variety of products

The supply chain strategy must change for


strategic fit.
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Expanding Strategic Scope

Scope of strategic fit

The functions and stages within a supply chain that devise


an integrated stategy with a shared objective

Five categories:

Intracompany intraoperation scope


Intracompany intrafunctional scope
Intracompany interfunctional scope
Intercompany interfunctional scope
Flexible interfunctional scope

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Strategic Scope
Suppliers Manufacturer Distributor

Retailer

Customer

Competitiv
e Strategy
Product Dev.
Strategy
Supply Chain
Strategy

Marketing
Strategy

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Strategic Scope:
Intracompany Intraoperation Scope
Suppliers Manufacturer Distributor

Retailer

Customer

Competitiv
e Strategy
Product Dev.
Strategy
Supply Chain
Strategy

Marketing
Strategy

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Strategic Scope:
Intracompany Intrafunctional
Scope
Suppliers Manufacturer Distributor Retailer
Customer
Competitiv
e Strategy
Product Dev.
Strategy
Supply Chain
Strategy

Marketing
Strategy

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Strategic Scope:
Intracompany Interfunctional
Scope
Suppliers Manufacturer Distributor Retailer
Customer
Competitiv
e Strategy
Product Dev.
Strategy
Supply Chain
Strategy

Marketing
Strategy

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Intercompany
Interfunctional Scope

All stages coordinate strategy across all


functions

Each company must evaluate its actions in


the context of the entire supply chain

Increasing supply chain surplus or profit

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Strategic Scope:
Intercompany Interfunctional
Scope
Suppliers Manufacturer Distributor Retailer
Customer
Competitiv
e Strategy
Product Dev.
Strategy
Supply Chain
Strategy

Marketing
Strategy

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Flexible Intercompany
Interfunctional Scope

Ability to achieve strategic fit when partnering with


stages that change over time in the supply chain

Customer needs and members of the supply


chain change over time

A firm may have to partner with many different


firms over time

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Drivers of Supply Chain


Performance

Facilities

Inventory

raw materials, WIP, finished goods within a supply chain


inventory policies

Transportation

places where inventory is stored, assembled, or fabricated


production sites and storage sites

moving inventory from point to point in a supply chain


combinations of transportation modes and routes

Information

data and analysis regarding inventory, transportation, facilities


throughout the supply chain
potentially the biggest driver of supply chain performance
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A Framework for
Structuring Drivers
Efficiency

Responsiveness
Supply chain structure

Facilities

Transportation

Inventory

Information

Drivers

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Obstacles to Achieving
Strategic Fit
Increasing variety of products
Decreasing product life cycles
Increasingly demanding customers
Fragmentation of supply chain ownership
Globalization
Difficulty executing new strategies

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Major Obstacles to Achieving Fit

Multiple owners / incentives in a supply


chain
Local optimization and lack of global fit

Increasing product variety / shrinking life


cycles / customer fragmentation
Increasing implied uncertainty
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Definitions of Some SCM Practices


Outsourcing- It is the act of moving some of a firms
internal activities and decision responsibility to
outside providers (Sink and Langley, 1997). Firm can
focus on its core competencies.
Design for Logistic- It involves consideration of
material procurement and distribution costs during
product design phase.
VMI- Supplier decides on the appropriate inventory
levels of each of the products and appropriate
inventory policies to maintain the level.
Ex- P&G- Wal-Mart

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SCM Practices
Mass customization- Ability of company to deliver
highly customized products and services to different
customers around the world . Key for it is postponing
the task of differentiating a product for a specific
customer until the latest possible point in the supply
network.-Asian Paints
3PL- It is use of an outside company to perform all or
part of firms materials management and product
distribution functions.
Cross-Docking-Warehouses function as inventory
coordination points rather than storage points.-WalMart delivers about 80% of its goods utilizing cross
docking technique.
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SCM Practices
CPFR- Focuses on information sharing among supply
chain trading partners for purpose of planning,
forecasting, and inventory replenishment. Ex-WalMart and Proctor & Gamble
Electronic data interchange (EDI)-is the direct,
computer to computer transmission of
interorganisational transactions, including purchase
orders, shipping notices, debit or credit memos, and
more. Ex-Wal-Mart has a satellite network for
electronic data interchange that allows vendors to
directly access point of sales data in real time
enabling them to better forecasting and inventory
management.

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SCM Practices

Quick Response- Suppliers receive point of sales


(POS) data from retailers and use this information
to synchronize their production and inventory
activities with actual sales at the retailer.
Risk pooling- Demand across different locations
is aggregated. It reduces demand variability.
Strategic Partnership- Two or more business
organizations that have complementary products
or services join so that each may realize a strategic
benefit.

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Model for Selection of SCM Practices


Supply chain capabilities
and Resources

Type of product
Functional
Innovative

Level of
customization

Logistics

Supplier relations
Process capability
Customer service
Information sharing
Organizational structure
E-business readiness

Type of
industry
Chemicals
Food

Length of
product life
cycle

Supply Chain Strategy

Selection of SCM practices

Review of Supply chain


Performance
3
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Thank You

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