Ch2.

Achieving Strategic Fit in a Supply Chain

Byung-In Kim
Department of Industrial & Management Engineering
POSTECH
 Learning Objectives
1. Explain why achieving strategic fit （战略协调性） is critical to a company’s overall success.
2. Describe how a company achieves strategic fit between its supply chain strategy and its competitive strat-
egy.
3. Identify the main levers to deal with uncertainty in a supply chain.
4. Discuss the importance of expanding the scope of strategic fit across the supply chain.

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 Competitive and Supply Chain Strategies
• _Competitive strategy_______ defines __the set of customer needs_____ a company seeks to satisfy
through its products and services
– E.g. Wal-Mart aims to provide high availability of a variety of products of reasonable quality at low prices. Most
products sold at Wal-Mart are commonplace (everything from home appliances to clothing) and can be purchased
elsewhere. What Wal-Mart provides is a low price and product availability.

– McMaster-Carr sells maintenance, repair, and operations (MRO) products. It offers more than 500,000 products
through both a catalog and a Web site. Its competitive strategy is built around providing the customer with conve-
nience, availability, and responsiveness. With this focus on responsiveness, McMaster does not compete based on
low price.

– Clearly, the competitive strategy at Wal-Mart is different from that at McMaster.

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 Competitive and Supply Chain Strategies
– Blue Nile (online retailing model for diamonds) vs. Zales (sells diamond jewelry through retail outlets).

– Blue Nile has emphasized the variety of diamonds available from its Web site and the fact that its margins
are significantly lower. Customers, however, have to wait to get their jewelry and do not have any oppor-
tunity to touch and see it before purchase (provide a 30-day return period).

– At Zales, a customer can walk into the retail store, be helped by a salesperson, and leave immediately with
a diamond ring.

– Whereas Blue Nile offers more than 70,000 stones on its site, a typical Zales store carries less than 1,000.

• In each case, the competitive strategy is defined based on how the customer prioritizes product cost, delivery
time, variety, and quality.

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 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, manu-
facture 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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 The Value Chain

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 Achieving Strategic Fit
• The competitive strategy and all functional strategies must fit together to form a coordinated overall strat-
egy. Each functional strategy must support other functional strategies and help a firm reach its competitive
strategy goal.
• The different functions in a company must appropriately structure their processes and resources to be able
to execute these strategies successfully.
• 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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 Summary of Learning Objective 1
Strategic fit requires that all functions within a firm and stages in the supply chain target the same goal—one
that is consistent with customer needs. A lack of strategic fit between the competitive and supply chain strate-
gies can result in the supply chain taking actions that are not consistent with customer needs, leading to a re-
duction in supply chain surplus and a decrease in supply chain profitability.

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 How Is Strategic Fit Achieved?
1. Understanding the customer and supply chain uncertainty
2. Understanding the supply chain capabilities
3. Achieving strategic fit

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 Understanding the Customer and Supply Chain Uncertainty
• To understand the customer, a company must identify the needs of the _customer segment_being served.

• Seven-Eleven (convenience) vs. Sam’s club (low price)

• Customer demand from different segments varies along several attributes as follows
 Quantity of product needed in each lot
– An emergency order for material needed to repair a production line is likely to be small.

An order for material to construct a new production line is likely to be large

 Response time customers are willing to tolerate: emergency order vs. construction order
 Variety of products needed
– A customer may place a high premium on the availability of all parts of an emergency repair order from a
single supplier. This may not be the case for the construction order.

 Service level required

 Price of the product
 Desired rate of innovation in the product: high-end department customer vs. low price retailer customer
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 Understanding the Customer and Supply Chain Uncertainty
• _demand uncertainty– uncertainty of customer demand for a product
• _implied demand uncertainty__ – resulting uncertainty for only the portion of the demand that the
supply chain plans to satisfy based on the attributes the customer desires 是由供应链必须满足的那部
分需求所存在的不确定性。
• E.g., A firm supplying only emergency orders for a product will face a higher demand uncertainty than a
firm that supplies the same product with a long lead time, as the second firm has an opportunity to fulfill
the orders evenly over the long lead time.
• E.g., As a supply chain raises its level of service, it must be able to meet a higher and higher percentage of
actual demand, forcing it to prepare for rare surges in demand. Thus, raising the service level increases the
implied demand uncertainty even though the product’s underlying demand uncertainty does not change.

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 Customer Needs and Implied Demand Uncertainty
• Impact of Customer Needs on 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

Required service level increases Increase because the firm now has to handle unusual surges in demand

Rate of innovation increases Increase because new products tend to have more uncertain demand

Number of channels through which product Increase because the total customer demand per channel becomes less
may be acquired increases predictable

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 Implied Uncertainty and Other Attributes
1. Products with uncertain demand are often less mature and have less direct competition. As a result, mar-
gins tend to be high.
2. Forecasting is more accurate when demand has less uncertainty.
3. Increased implied demand uncertainty leads to increased difficulty in matching supply with demand. For
a given product, this dynamic can lead to either a _stockout_ or an _oversupply_ situation.
4. Markdowns are high for products with greater implied demand uncertainty because oversupply often re-
sults.

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 Implied Uncertainty and Other Attributes
• Correlation Between Implied Demand Uncertainty and Other Attributes

Blank Low Implied Uncertainty High Implied Uncertainty

Product margin Low High

Average forecast error 10% 40% to 100%
Average stockout rate 1% to 2% 10% to 40%
Average forced season-end markdown 0% 10% to 25%

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 Impact of Supply Source Capability
• Impact of Supply Source Capability on Supply Uncertainty

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

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 Implied Uncertainty (Demand and Supply) Spectrum

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 Understanding Supply Chain Capabilities
• How does the firm best meet demand in that uncertain environment?
• _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

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 Understanding Supply Chain Capabilities
• Responsiveness comes at a cost
• _supply chain efficiency____________________ is the inverse to the cost of making and delivering the product to
the customer
• The cost-responsiveness efficient frontier curve shows the lowest possible cost for a given level of responsive-
ness

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 Responsiveness Spectrum

Market Kurly

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 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 the appropriate level of responsiveness
• Ensure that all functions maintain consistent strategies that support the ___competitive
strategy________________

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 Zone of Strategic Fit

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 Roles and Allocations
• Different Roles and Allocations of Implied Uncertainty for a Given Level of Supply Chain Responsiveness

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 Efficient and Responsive Supply Chains
• Comparison of Efficient and Responsive Supply Chains

nt Supply Chains Responsive Supply Chains

demand at the lowest cost Respond quickly to demand

ze performance at a Create modularity to allow postponement

m product cost of product differentiation
margins because price is a Higher margins because price is not a
ustomer driver prime customer driver
Maintain capacity flexibility to buffer
osts through high utilization against demand/supply uncertainty

ze inventory to lower cost Maintain buffer inventory to deal with

demand/supply uncertainty
, but not at the expense of Reduce aggressively, even if the costs are
significant

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

and quality

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 Tailoring the Supply Chain
• Achieve strategic fit while serving _many customer segments____________________ with a variety of
products across multiple channels  Tailored SC strategy is needed.
• Example. Zara sells trendy items with unpredictable demand along with basics, such as white T-shirts, with
a more predictable demand.  Zara uses a responsive SC with production in Europe for trendy items and a
more efficient SC with production in Asia for the basics.
• Requires sharing operations for some links in the supply chain, while having separate operations for other
links

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 Changes over Product Life Cycle
• Beginning stages
1. Demand is very uncertain, and supply may be unpredictable
2. Margins are often high, and time is crucial to gaining sales
3. Product availability is crucial to capturing the market
4. Cost is often a secondary consideration

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

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 Summary of Learning Objective 2
To achieve strategic fit, a company must first understand the needs of the customers being served and the ca-
pabilities of all supply sources. Both the needs and the capabilities should be used to identify the implied un-
certainty that the supply chain must absorb. The second step is to understand the supply chain’s capabilities in
terms of _efficiency_ and _responsiveness__. The key to strategic fit is ensuring that supply chain responsive-
ness is consistent with customer needs, supply capabilities, and the resulting implied uncertainty. Tailoring the
supply chain is essential to achieving strategic fit when supplying a wide variety of customers with many
products through different channels.

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 Supply Chain Levers
• Five basic levers to deal with uncertainty
– Capacity, combination of excess capacity and flexible capacity
– Inventory, one of the most common levers used in practice to deal with uncertainty
– Time, combination of speedy supply and the willingness of customers to wait
– Information, appropriate information can help a supply chain reduce uncertainty
– Price, prices of products and services that vary over time

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 Summary of Learning Objective 3
The implied uncertainty that a supply chain needs to absorb depends on the needs of the customer segment(s)
targeted. Capacity, inventory, time, information, and price are the five levers that a supply chain can use to
deal with this uncertainty. Investing more in one lever generally allows the supply chain to invest less in one
or more of the other levers. To achieve strategic fit, a supply chain must find the right balance between in-
vestments in the five levers to effectively serve the target customer segment(s).

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 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
• Intraoperation Scope: Minimizing Local Cost
– Each stage of the supply chain devises strategy independently
• Intrafunctional Scope: Minimizing Functional Cost
– Firms align all operations within a function
• Interfunctional Scope: Maximizing Company Profit
– Functional strategies are developed to align with one another and with the competitive strategy
• Intercompany Scope: Maximizing Supply Chain Surplus
– Supplier and customer work together and share information to reduce total cost and increase supply chain surplus
• Agile Intercompany Scope
– A firm’s ability to achieve strategic fit when partnering with supply chain stages that change over time

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 Summary of Learning Objective 4
The scope of strategic fit refers to the functions and stages within a supply chain that coordinate strategy and
target a common goal. When the scope is narrow, individual functions try to optimize their performance based
on their own goals. This practice often results in conflicting actions that reduce the supply chain surplus. As
the scope of strategic fit is enlarged to include the entire supply chain, actions are evaluated based on their im-
pact on overall supply chain performance, which helps increase supply chain surplus.

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