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Supply Chain Performance: Achieving Strategic Fit and Scope
Spring, 2014
Supply Chain Management:Strategy, Planning, and Operation
Chapter 2
Byung-Hyun Ha
2
Outline
Competitive and supply chain strategies
Achieving strategic fit
Expanding strategic scope
Obstacles to achieving strategic fit
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Competitive and Supply Chain Strategies
Competitive strategy (of an organization) Defines the set of customer needs a firm seeks to satisfy throug
h its products and services, relative to its competitor
Examples Wal-Mart
• High availability of variety of products of reasonable quality
• Low price
McMaster-Carr (MRO)• More than 500,000 different products (through a catalog and Web)
• Convenience, availability, responsiveness
• Not competing based on low price
Blue Nile vs. Zales
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Competitive and Supply Chain Strategies
Functional strategies 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
• Supplier strategy, operations strategy, logistics strategy
Consistency& support!
NewProduct
Development
Marketingand
SalesOperations Distribution Service
Finance, Accounting, Information Technology, Human Resources
ValueChain
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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
• e.g., Dell’s competitive strategy before and after 2007
Three basic steps to achieve strategic fit Step 1: Understanding the customer and supply chain uncertainty Step 2: Understanding the supply chain Step 3: Achieving strategic fit
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How is Strategic Fit Achieved?
Step 1: Understanding the customer and supply chain uncertainty Identify the needs of the customer segment being served
• 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
Understanding the customer• Demand uncertainty
• 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
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How is Strategic Fit Achieved?
Step 1: Understanding the uncertainty (cont’d) Impact of customer needs on implied demand uncertainty
Customer Need Causes implied demand uncertainty to increase because …
Range of quantity required increases Wider range of quantity required 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 through which product may be acquired 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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How is Strategic Fit Achieved?
Step 1: Understanding the uncertainty (cont’d) Correlation between Implied demand uncertainty and other
Attributes
Attribute Low Implied Uncertainty
High Implied Uncertainty
Product margin Low High
Avg. forecast error 10% 40%-100%
Avg. stockout rate 1%-2% 10%-40%
Avg. forced season-end markdown 0% 10%-25%
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How is Strategic Fit Achieved?
Step 1: Understanding the uncertainty (cont’d) Supply uncertainty
• Uncertainty resulting from the capability of the supply chain
Impact of supply source capability on supply uncertainty
Supply Source Capability Causes Supply Uncertainty to ...
Frequent breakdown Increase
Unpredictable and low yields Increase
Poor quality Increase
Limited supply capacity Increase
Inflexible supply capacity Increase
Evolving production process Increase
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How is Strategic Fit Achieved?
Step 1: Understanding the uncertainty (cont’d) Levels of implied demand uncertainty
Predictable supply and
demand
Salt at a supermarket
A new communication
device
Highly uncertain supply and demand
Predictable supply and uncertain demand or uncertain supply and predictable demand or somewhat
uncertain supply and demand
An existing automobile
model
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How is Strategic Fit Achieved?
Step 2: Understanding the supply chain How does the firm best meet demand in uncertain environment? Supply chain responsiveness
• 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
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
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How is Strategic Fit Achieved?
Step 2: Understanding the supply chain Cost-responsiveness efficient frontier
High Low
Low
High
Responsiveness
Cost
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How is Strategic Fit Achieved?
Step 2: Understanding the supply chain Responsiveness spectrum
• e.g., Seven-Eleven Japan, Sam’s Club
Integratedsteel mill
Dell
Highlyefficient
Highlyresponsive
Somewhatefficient
Somewhatresponsive
Hanesapparel
Mostautomotiveproduction
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How is Strategic Fit Achieved?
Step 3: Achieving strategic fit Match supply chain responsiveness with implied uncertainty
Implied uncertainty spectrum
Responsive supply chain
Efficient supply chain
Certain demand
Uncertain demand
Responsiveness spectrum Zone of
Strategic Fit
Implied uncertainty spectrum
Responsive supply chain
Efficient supply chain
Certain demand
Uncertain demand
Responsiveness spectrum Zone of
Strategic Fit
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How is Strategic Fit Achieved?
Step 3: Achieving strategic fit (cont’d) Different roles and allocations of implied uncertainty
• One stage more responsive other stages more efficient
• e.g., IKEA and England, Inc
All functions in the value chain must support the competitive strategy
• All functions in supply chain, such as manufacturing, inventory, and purchasing, to be consistent, too
Extent of Implied Uncertainty for the Supply Chain
supplier manufacturer retailer
supplier manufacturer retailer
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How is Strategic Fit Achieved?
Step 3: Achieving strategic fit (cont’d) Comparison of efficient and responsive supply chain
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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How is Strategic Fit Achieved?
It sounds easy, but in reality quite difficult!1. There is no supply chain strategy that is always right
2. There is a right supply chain strategy for a given competitive strategy.
Commitment by top executives!
Other issues affecting strategic fit Multiple products and customer segments Product life cycle Globalization and competitive changes over time Growing supply chain uncertainty Environment and sustainability
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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 ow
n 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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Expanding Strategic Scope
Different scope of strategic fit across supply chain
Suppliers Manufacturer Distributor Retailer Customer
Competitive Strategy
Product Development
Strategy
Supply Chain Strategy
Marketing Strategy
IntracompanyIntraoperationat Distributor
IntracompanyIntrafunctionalat Distributor
IntracompanyInterfunctional
at Distributor
IntercompanyInterfunctional
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Obstacles to Achieving Strategic Fit
Increasing variety of products
Decreasing product life cycle
Increasing Demanding customers
Fragmentation of supply chain ownership
Globalization
Changing business environment
Difficulty executing new strategies
