Chapter 2

Supply Chain Performance
Achieving Strategic Fit and Scope

Competitive and Supply Chain Strategies
• Competitive strategy defines the set of customer needs a firm seeks to
satisfy through its products and services
eg : Walmart-low cost,reasonable quality,high availability
McMaster-Carr-MRO products ( variety,responsiveness,availability)
• Product development strategy specifies the portfolio of new products
• 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
All functional strategies must support one another and the competitive strategy
The Value Chain
Achieving Strategic Fit
• Strategic fit – competitive and supply chain strategies should have aligned
goals
1. The competitive strategy & all functional strategies must 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
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
eg: Dell 1993-2006(customisation) 2007 onwards : towards low cost(@ Walmart)
Basic steps in achieving the Strategic Fit
1. Understanding the customer and supply chain uncertainty
2. Understanding the supply chain capabilities
3. Achieving strategic fit

Achieving the Strategic Fit
Step 1: Understanding Customer & Supply Chain Uncertainty
• 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
• 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
Customer Needs & Implied Demand Uncertainty

Customer Need Causes Implied demand uncertainty to …
Range of quantity required increases Increase because a wider range of the quantity required implies
greater variance in demand
Lead time decreases Increase because there is less time in which to react to orders
Variety of products required increases Increase because demand per product becomes less predictable
Number of channels through which Increase because the total customer demand per channel
product may be acquired increases becomes less predictable
Rate of innovation increases Increase because new products tend to have more uncertain
demand
Required service level increases Increase because the firm now has to handle unusual surges in
demand
Implied Uncertainty and Other Attributes
1. Products with uncertain demand are often less mature and have less direct
competition leading to high margins
2. Forecasting is more accurate when uncertainty in demand is less
3. Increased implied demand uncertainty leads to increased difficulty in

matching supply with demand. For a given product, this leads to either a
stockout/oversupply situation
4. Markdowns are high for products with greater implied demand uncertainty
because oversupply often results
Markdowns are reductions from the original selling price

Impact of Supply Source Capability
Supply Source Capability Causes Supply Uncertainty to...

Frequent breakdowns Increase
Unpredictable and low yields Increase
Poor quality Increase
Limited supply capacity Increase
Inflexible supply capacity Increase
Evolving production process Increase
Step 2: Understanding the Supply Chain Capabilities
Implied Uncertainty
(Demand and Supply) Spectrum
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
Step 3: Achieving Strategic Fit
• Ensure that the degree of supply chain responsiveness is consistent with

the implied uncertainty
• Assign roles to different stages of the supply chain that ensure appropriate
level of responsiveness
• Ensure that all functions maintain consistent strategies that support the
competitive strategy
eg : IKEA ,has stores in 40 countries

Large inventory stock in each store,to reduce uncertainty
(uncertainty absorbed by stores)
Roles and Allocations

Efficient and Responsive Supply Chains

Efficient Supply Chains Responsive Supply Chains
Primary goal Supply demand at the lowest cost Respond quickly to demand
Product design Maximize performance at a minimum Create modularity to allow postponement

strategy product cost of product differentiation
Pricing strategy Lower margins because price is a prime Higher margins because price is not a prime
customer driver customer driver
Manufacturing Maintain capacity flexibility to buffer
Lower costs through high utilization
strategy against demand/supply uncertainty
Inventory strategy Minimize inventory to lower cost Maintain buffer inventory to deal with
demand/supply uncertainty
Reduce aggressively, even if the costs are

Lead-time strategy Reduce, but not at the expense of costs significant
Select based on speed, flexibility, reliability,

Supplier strategy Select based on cost and quality and quality
Tailoring the Supply Chain
• Achieve strategic fit while serving many customer segments with a variety
of products across multiple channels
• Sharing some links in the supply chain with some products, while having
separate operations for other links
eg : Zara : trendy items having unpredictable demand (responsive SC),Polo T shirt – predictable demand – efficient SC
Levi Strauss : Customised jeans & basic jeans
Expanding Strategic Scope
Scope of strategic fit – the functions within the firm and stages across the supply chain
that devise an integrated strategy with an aligned objective
IKEA : Final assy & last mile delivery(two high cost operations moved to customer)
• Intraoperation Scope: Minimize Local Cost View

– Each stage of the supply chain devises strategy independently
• Intrafunctional Scope: Minimizing Total Functional Cost
– Firms align all operations within a function
• Interfunctional Scope: Maximize Company Profit
– Functional strategies are developed to align with one another and the
competitive strategy
• Intercompany Scope: Maximize Supply Chain Surplus
– Supplier and customer work together and share information to reduce
total cost and increase supply chain surplus
INDIAN RETAIL SECTOR
• What different models of supply chains do you visualize emerging in the

transforming Indian retail sector?
• What trends do you see in in the emerging Indian supply chain models
that suggest conscious attempts at achieving proper strategic fit between
business strategies and supply chain strategies?
• How do you see the Indian retail supply chains becoming role models for
supply chains in other sectors?

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Supply Chain Performance

Achieving Strategic Fit and Scope

• Product development strategy specifies the portfolio of new products

• Supply chain strategy determines the nature of material procurement,

2. The different functions in a company must appropriately structure their

1. Understanding the customer and supply chain uncertainty

2. Understanding the supply chain capabilities

3. Achieving strategic fit

Step 1: Understanding Customer & Supply Chain Uncertainty

• Quantity of product needed in each lot

• Demand uncertainty – uncertainty of customer demand for a product

Customer Needs & Implied Demand Uncertainty

Implied Uncertainty and Other Attributes

2. Forecasting is more accurate when uncertainty in demand is less

3. Increased implied demand uncertainty leads to increased difficulty in

Markdowns are reductions from the original selling price

Impact of Supply Source Capability

Supply Source Capability Causes Supply Uncertainty to...

• How does the firm best meet demand?

• Ensure that the degree of supply chain responsiveness is consistent with

eg : IKEA ,has stores in 40 countries

Roles and Allocations

Efficient and Responsive Supply Chains

Product design Maximize performance at a minimum Create modularity to allow postponement

Reduce aggressively, even if the costs are

Select based on speed, flexibility, reliability,

• Intraoperation Scope: Minimize Local Cost View

• What different models of supply chains do you visualize emerging in the

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