LSA 2023 Session 2 - Achieving Supply Chain Fit (Before Lecture)

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Session 2:

Achieving Supply Chain Fit


35E00750 Logistics Systems and Analytics

Dr. Tri M. Tran


Assistant Professor of Operations Management
University of Groningen
https://www.rug.nl/staff/tri.tran/
Learning objectives

1. Explain why achieving supply chain fit is critical to a company’s overall success

2. Describe how a company could achieve supply chain fit

3. Identify the performance effect of supply chain fit

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Why is supply chain fit
crucial?
Competitive and supply chain strategies

• Competitive strategy defines the set of customer needs a company 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, follow-up
service, whether processes will be in-house or outsourced
• All functional strategies must support one another and the competitive
strategy

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Competitive and supply chain strategies

Competitive strategy

Functional Product development Marketing &sales


Supply chain strategy
strategies strategy strategy

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The value chain in a company

The fuzzy front end This is where we focus on


(FFE), where supplier throughout the course!
involvement and
innovation are crucial

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Achieving supply chain fit

• Supply chain fit – competitive and supply chain strategies have aligned goals

• For a firm to achieve supply chain fit, it must accomplish the following:
1. The competitive strategy and all functional strategies must be fit together to form a
coordinated overall strategy
2. The different functions in a company must appropriately structure their processes and
resources to be able to execute these strategies successfully
3. The design of the overall supply chain and the role of each stage must be aligned to
support the supply chain strategy

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How is supply chain fit
achieved?
Step 1: Understanding the customers and supply
chain uncertainty
• Must identify the needs of the customer segment being served
• Seven-Eleven (R-kioski) vs. Sam’s Club (Walmart, Prisma)

• Customer demand from different segments varies along several attributes, as


follows.
• Quantity of the product needed in each lot
• Response time customers are willing to tolerate
• Variety of products needed
• Service level required
• Price of the product
• Desired rate of innovation of the product

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Demand and supply uncertainty

• Demand uncertainty – uncertainty of customer demand for a product


• Emergency (high) vs. long—lead time order (low)
• When service level increases?
• When channel complexity increases?

• Supply uncertainty – uncertainty of supply sources for a product


• New products (high) vs. mature products (low)
• When breakdowns occur?
• Poor quality issues, then?

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The implied uncertainty (demand and supply)
spectrum

Predictable supply and uncertain


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

Salt at a An existing A new


supermarket automobile communication
model device

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Step 2: Understanding the supply chain capabilities

• How does the firm best meet demand?


• Supply chain responsiveness is the 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 high service level
• Handle supply uncertainty
• Responsiveness comes at a cost
• Supply chain efficiency is the inverse to the cost of making and delivering the products
to the customers

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trade-off between cost and responsiveness, a key strategic choice for any supply chain is the level
of responsiveness it seeks to provide.
Cost-responsiveness efficient frontier
Supply chains range from those that focus solely on being responsive to those that focus on
a goal of producing and supplying at the lowest possible cost. Figure 2-4 shows the responsive-
ness spectrum and where some supply chains fall on this spectrum.
• The cost-responsiveness efficient
frontier curve shows the lowest
Cost possible cost for a given level of
Low responsiveness

Firm B

Firm C
Firm A

High
Responsiveness
Low High

Figure 2-3 Cost-Responsiveness Efficient Frontier

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M02_CHOP3952_05_SE_C02.QXD 10/10/11 6:00 PM Page 27

The responsiveness spectrum

Chapter 2 • Supply Chain Performance: Achieving Strategic Fit and Scope 27

Highly Somewhat Somewhat Highly


efficient efficient responsive responsive

Integrated steel Hanes apparel: A Most automotive Seven-Eleven


mills: Production traditional make-to- production: Japan: Changing
scheduled weeks stock manufacturer Delivering a large merchandise mix
or months in with production variety of products by location and
advance with lead time of in a couple time of day
little variety or several weeks of weeks
flexibility
FIGURE 2-4 The Responsiveness Spectrum

STEP 3: ACHIEVING STRATEGIC FIT After mapping the level of implied uncertainty and
understanding the supply chain position on the responsiveness spectrum, the third and final
step is to ensure that the degree of supply chain responsiveness is consistent with the implied
uncertainty. The goal is to target high responsiveness for a supply chain facing high implied
uncertainty, and efficiency for a supply chain facing low implied uncertainty. 14
For example, the competitive strategy of McMaster-Carr targets customers who value
Step 3: Achieving supply chain fit

1. Ensure that the degree of supply chain


responsiveness is consistent with the implied
uncertainty

2. Assign roles to different supply chain stages that


ensure the appropriate level of responsiveness

3. Ensure that all functions maintain consistent


strategies that support the competitive strategy

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M02_CHOP3952_05_SE_C02.QXD 10/10/11 6:00 PM Page 28

Zone of supply chain fit (1/2)

28 Chapter 2 • Supply Chain Performance: Achieving Strategic Fit and Scope


• IKEA limits the variety it needs to stock and
Responsive
stocks all components in inventory; Supply Chain
replenishment orders are stable
• IKEA and suppliers?
e of Fit
• England Inc.’s retailers hold little inventory; Responsiveness n ic
Zo teg
Spectrum ra
provides a wide variety of products; and St
promise quick delivery
• The retailers and supplier (i.e., England
Efficient
Inc.)? Supply Chain
Certain Implied Uncertain
Demand Uncertainty Demand
Spectrum
FIGURE 2-5 Finding the Zone of Strategic Fit

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The next step in achieving strategic fit is to assign roles to different stages of the s
chain that ensure the appropriate level of responsiveness. It is important to understand th
Assign different roles
Chapter 2 • Supply Chain Performance: Achieving Strategic Fit and Scope 29

Supplier absorbs Manufacturer


the least implied absorbs less implied Retailer absorbs most
uncertainty and uncertainty and of the implied
must be very must be somewhat uncertainty and must
efficient. efficient. be very responsive.
Supplier Manufacturer Retailer Supply Chain I

Extent of Implied Uncertainty for the Supply Chain

Supplier Manufacturer Retailer Supply Chain II


Supplier absorbs Manufacturer Retailer absorbs
less implied absorbs most of the the least implied
uncertainty and implied uncertainty uncertainty and
must be somewhat and must be very must be very
efficient. responsive. efficient.
FIGURE 2-6 Different Roles and Allocations of Implied Uncertainty for a Given
Level of Supply Chain Responsiveness

The preceding discussion illustrates that the supply chain can achieve a given level of
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responsiveness by adjusting the roles of each of its stage. Making one stage more responsive
allows other stages to focus on becoming more efficient. The best combination of roles
Efficient and responsive supply chains
Goal / functions Efficient supply chains Responsive supply chains

Primary goal Supply demand at the lowest cost Respond quickly to demand

Product design strategy Maximize performance at a minimum Create modularity to allow postponement of
product cost product differentiation

Pricing strategy Lower margins because price is a prime Higher margins because price is not a prime
customer driver customer driver

Facility strategy Maintain capacity flexibility to buffer against


Lower costs through high utilization
demand/supply uncertainty

Inventory strategy Minimize inventory to lower cost Maintain buffer inventory to deal with
demand/supply uncertainty

Lead-time strategy Reduce aggressively, even if the costs are


Reduce, but not at the expense of costs
significant

Supplier strategy Select based on cost and quality Select based on speed, flexibility, reliability, and
quality

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Tailoring the supply chain

• Achieve supply chain fit while serving many customer segments with a variety of
products
• “One size fits all” supply chain cannot provide supply chain fit

• Tailoring requires sharing operations for some links and separate operations for
other links
• For example, all products may be made on the same line in a plant, but products requiring
high responsiveness may be shipped using a fast expensive mode of transportation, while
products that do not require high responsiveness may be sent by slower and less expensive
means

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Changes over product life cycle

• Beginning stages
• Demand is very uncertain, and supply may be unpredictable
• Margins are often high, and time is crucial to gaining sales
• Product availability is crucial to capturing the market
• Cost is often a secondary consideration

• Later stages
• Demand has become more certain, and supply is predictable
• Margins are lower as a result of an increase in competitive pressure
• Price becomes a significant factor in customer choice

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Performance effect of
supply chain fit
An empirical investigation

• Primary (survey questionnaire) and secondary (Bloomberg) data yielded a total of 259
firm samples
• Focus on the United States and Western Europe
• Focus on manufacturing industries
• 65% of companies with sales turnover > EUR 1 bn

Source: Wagner, S. M., Grosse-Ruyken, P. T., & Erhun, F. (2012). The link between supply chain fit and financial performance
of the firm. Journal of Operations Management, 30(4), 340-353.

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Industry segments with blue chips

Source: Wagner et al. (2012)

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An empirical investigation - Measures

• Supply chain fiti (SCFi) = Supply and demand uncertaintyi – Supply chain
responsivenessi
• The deviation score captures the degree of misfit on a continuum between a total misfit
and a perfect fit, where lower (higher) values indicate greater fit (misfit)
• Measures of supply and demand uncertainty (for example):
• Average product life-cycle (1: < 6 months – 5: > 5 years)
• Product variety (1: <20 –5: 1000 or more)
• Measures of supply chain responsiveness (for example):
• Improved delivery reliability (1: not important at all – 5: extremely important)
• Maintain buffer inventory of parts or finished goods (1: not important at all – 5: extremely
important)
Source: Wagner et al. (2012)

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An empirical investigation - Results

• ROAi = 2.299 + [Controlsi] – 1.268 SCFi,


which is significantly different from zero,
with an F value of 25.852 and adjusted R2
of 0.715

• This indicates that the average decrease


of 1.268 ROA in % for every additional
value of SCF
• Average %ROA: 6.49
• Average SCF: 1.06

Source: Wagner et al. (2012)

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Case: Supply Chain Fit
Individual assignment

• Due in around one week (Sunday, 23:59 midnight #TaylorSwift)

• The case description is available on MyCourses

• Questions? Concerns?

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The Fresh Connection
Supply Chain Strategy and Its Strategic Fit
The Fresh Connection (TFC) Assignment

For the TFC assignment, we expect the following


o Before playing the game:
1. What supply chain strategy do you choose?
• And why?
2. How is the supply chain strategy operationalized at each department (sales, purchasing, supply chain
management, operations)?
3. How do you measure the performance of each department? (e.g., KPIs)
We’ll discuss the
o After the game: importance of
measurements in the
1. How did the strategy turn out? last lecture
• Reflect on what you did well/badly and why? Does your strategy really fit?
• Was any of your assumptions incorrect?
2. What could you have done differently?
Note: We expected reflections, analyses, and discussions. You should go far beyond providing a
decision log

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Thank you!
Questions?
Dr. Tri M. Tran ([email protected])

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