Supply Chain Management

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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 Competitive and Supply
Chain Strategies
 Competitive Strategy: defines the set of customer needs a firm seeks to satisfy through its products and services

…Provide high availability of a variety of products of reasonable quality at low prices (value-for-money and product availability).

Competitive strategy…how the customer prioritize product cost, delivery time, variety, and quality.

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 Competitive and Supply
Chain Strategies: The Value Chain

Finance, Accounting, Information Technology, Human Resources

New Marketing
Product and Operations Distribution Service
Development Sales

 The value chain begins with new product development, which creates specification for the
product.
 Marketing and sales generate demand by publicizing the customer priorities that the products and
services will satisfy.
 Operations transforms input to outputs to create the product according to new product
specifications.
 Distribution either takes the product to the customer or brings the customer to the product.
 Service responds to customer requests during or after the sale.
 Finance, accounting, information technology and human resources support and facilitate the
functionality of the value chain.

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 Competitive and Supply
Chain 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
– Consistency and support between supply chain strategy, competitive strategy,
and other functional strategies is important
– Examples: Amazon’s decisions to build warehouses to stock some products and
to continue using distributors as a source of other products are part of its supply
chain strategy while Toyota’s decision to have production facilities in each of
its major markets is part of its supply chain strategy.

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 Achieving Strategic Fit
 Strategic fit:
– Refers to consistency between customer priorities that the competitive
strategy hopes to satisfy and supply chain capabilities that the supply
chain strategy aims to build.
– Requires that both competitive and supply chain strategies have the
same goals.
 A company may fail because of a lack of strategic fit or because its overall
supply chain design, processes and resources do not provide the capabilities
to support the desired strategic fit.
 Example of strategic fit – Dell’s competitive strategy…to provide a large variety of
customizable products at a reasonable price which require to design very responsive,
flexible and easy to handle wide variety of configurations requested by consumers…
A facility that focused on low cost and efficiency by producing large volumes of the
same configuration would not have been appropriate in this setting.

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 How is Strategic Fit Achieved?
 Step 1: Understanding the customer and supply chain
uncertainty
 Step 2: Understanding the supply chain capabilities
 Step 3: Achieving strategic fit

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 Step 1: Understanding the Customer
and Supply Chain Uncertainty
 To understand the customer, a company must identify the needs
of the customer segment being served.
– Examples: 7 Eleven Japan (the convenience of a nearby store…customers are in a hurry) versus Sam’s
Club (low price is important…customers tolerate less variety)

 Customer demand from different segments varies along several

attributes, as follows:
– Quantity of 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 in the product

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 Step 1: Understanding the Customer
and Supply Chain Uncertainty
 Implied demand uncertainty also related to customer needs and
product attributes
 Demand uncertainty: the uncertainty of customer demand for a
product
 Implied demand uncertainty: the resulting uncertainty for only
the portion of the demand that the supply chain plans to satisfy
based on the attributes the customer desires.
– For example: emergency orders (HIDU) versus long lead time (LIDU).
 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 Customers and their needs
– Lot size
– Response time
– Service level Implied
– Product variety Demand
– Price Uncertainty
– Innovation

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 Impact of Customer Needs on Implied
Demand Uncertainty (Table 2.1)
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 Demand per product becomes more

increases 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 (IDU)

Predictable Predictable supply and uncertain Highly uncertain

supply and demand or uncertain supply and supply and demand
demand predictable demand or somewhat
uncertain supply and demand

Salt at a An existing A new

supermarket automobile communication
model device

Figure 2.2: The Implied Uncertainty (Demand and Supply)

Spectrum

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 Products Differ Vs.

Attribute Functional Products vs. Innovative Products

Demand Predictable (LIDU) Unpredictable (HIDU)
Product Life Cycle > 2 years 3 months to 1 year
Contribution Margin 5% to 20% 20% to 60%
Low High
Variety
10-20 variants per category 000’s of variants / category
Average Forecast Error
10% 40% to 100%

Average Stock out Rate

1% to 2% 10% to 40%

Average end-of-season
markdowns 0% 10% to 25%
(% of full Price
Made-to-Order
6 months to 1 year 1 day to 2 weeks
Lead Time
From What is the Right Supply Chain for your Product? Contribution margin = price – variable cost ÷ price expressed
as %. Functional or simpler products vs. innovative or more complex products. It could be soup vs. designer sun
glasses; soup vs. fashion ski wear; or soup vs. computers. Can you list some other functional and or innovative
products? (LIDU=Low Implied Demand Uncertainty, HIDU=High Implied Demand Uncertainty)
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 Impact of supply source capability on
supply uncertainty (Table 2.3)
Supply source capability Causes supply uncertainty to…

Frequent breakdowns Increase (Example, launching brand new

electronics with new components)

Unpredictable and low yields Increase

Poor quality Increase

Limited supply capability Increase

Inflexible supply capacity Increase

Evolving production process Increase

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 Step 2: Understanding the
Supply Chain Capabilities
 How does the firm best meet demand in that uncertain
environment?
 Creating a strategic fit is all about designing a supply chain
whose responsiveness aligns with the implied uncertainty it
faces.
 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 Capabilities
 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 Capabilities:
Cost-Responsiveness Efficient Frontier
Responsiveness

High

Low
Cost
High Low
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 Responsiveness Spectrum
(Figure 2.4)

Highly Somewhat Somewhat Highly

efficient efficient responsive responsive

Integrated Hanes Most Seven

steel mill Apparel automotive Eleven
(Production (A production Japan
scheduled weeks traditional
(Delivering a large (Changing
or months in make-to-
variety of products merchandise
advance with stock
in a few weeks) mix by location
little variety or manufacture
and time of
flexibility) r with
delivery)
production
lead time of
several
weeks)
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 Step 3: Achieving Strategic Fit
 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.

 Fig. 2.5: Finding the Zone of strategic fit

 Examples: Dell computer (high responsive), Barilla pasta(low

implied demand uncertainty)

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 Finding the Zone of Strategic Fit Shown
(Fig. 2.5)
Responsive
supply chain

Responsiveness e of it
n F
spectrum Zo egic
t
t ra
S

Efficient
supply chain

Certain Implied Uncertain

demand uncertainty demand
spectrum
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 Comparison of Efficient and
Responsive Supply Chains (Table 2.4)
Efficient Responsive
Primary goal Supply demand at lowest cost Respond quickly to demand
Product design strategy Maximize performance at a Create modularity to allow
minimum product cost postponement of product
differentiation
Pricing strategy Lower margins Higher margins
Manufacturing strategy High utilization Maintain capacity flexibility
Inventory strategy Minimize inventory Buffer inventory
Lead time strategy Reduce but not at expense of Aggressively reduce even if
greater cost costs are significant
Supplier strategy Select based on cost and low Select based on speed,
quality flexibility, quality
Transportation strategy Greater reliance on low cost Greater reliance on
modes responsive (fast) modes

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 Where is there a match between type of product and type of supply chain?
Where is there a mismatch?
See the next slide.
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 Match Mismatch

Mismatch Match

What are some examples of products and companies in each quadrant?

Dell is a well known example of an innovative (i.e. complex) product requiring a responsive supply chain, and the Dell model of on-line
ordering and assemble to order manufacturing provides that responsiveness.
But that has changed as the PC has become a commodity or functional product.

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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:
1. Intracompany intraoperation scope (To minimize local cost view
such as transportation Cost)
2. Intracompany intrafunctional scope (To minimize total functional
view such as Manufacturing, Warehousing, transportation)
3. Intracompany interfunctional scope (To maximize company Profit
View)
4. Intercompany interfunctional scope (To maximize supply chain
surplus View. Ex: Zara-Apparel Retailer-Speed is the main strategy)
5. Agile intercompany scope (To achieve strategic fit when patterning
with supply chain stages that change over time)

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 Different Scopes of Strategic Fit
Across a Supply Chain

Suppliers Manufacturer Distributor Retailer Customer

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

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 Challenges to Achieving and Maintaining Strategic Fit

 Increasing product variety and shrinking product life cycle

– Apple has had greater success limiting its product variety while continuing to
introduce new products.

 Globalization and increasing uncertainty

– Fluctuations in exchange rates, global demand and the price of crude oil

 Fragmentation of supply chain ownership

– Many owners from diverse countries…each with its own policies and interests

 Changing technology and business environment

– Dell enjoyed tremendous success with a supply chain strategy based on selling customized desktop
PCs direct to customer (build-to-order system)…now moved to laptops…start selling through retail
outlets…outsourced to low-cost contract manufacturers.
 The environment and sustainability
– Environmental issues and increased regulations (appropriate packaging)

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 Summary of Learning Objectives
 Why is achieving strategic fit critical to a company’s
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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