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
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
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Case of Competitive
Strategy
Wal-Mart : Common place products
Low price and High Availability
Vs
Mc-Master –Carr: MRO products (>
40,000) by website or catalog
Convenience, Availability &
responsiveness
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The Value Chain: Linking
Supply Chain and
Business Strategy
Business Strategy
New Product Marketing
Strategy Strategy
Supply Chain Strategy
F UNCTIONAL STRATIGIES
New Marketing
Product and Operations Distribution Service
Development Sales
Finance, Accounting, Information Technology, Human Resources
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7-11 : Fit among
strategies
New Product Strategy: constantly adding new
product
Marketing: easy access to stores &
availability of a wide range of products &
services
Operation & Distribution: high density of
stores, being very responsive
Service: : excellent infrastructure to provide
information
This all results in a virtuous cycle
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Achieving Strategic Fit
Introduction
How is strategic fit achieved?
Other issues affecting strategic fit
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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 or because its processes and
resources do not provide the capabilities to
execute the desired strategy
Example of strategic fit – Dell
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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
Identify the needs of the customer segment being
served as customer demand from different
segments varies along with attributes given as
follows: (e. g compare emergency & regular
order)
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
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Step 1: Understanding
the Customer and Supply
Chain Uncertainty
Demand uncertainty: uncertainty of
customer demand for a product
Two types of uncertain demand are there
on basis of target of marketing dept. (a)
Uncertain demand for which supply chain
is ready (b) Uncertain demand based on
unforeseen circumstances
Implied demand uncertainty( Type a) is
the demand uncertainty due to the portion
of demand that the supply chain is
targeting , not the entire demand
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Step 1: Understanding
the Customer and Supply
Chain Uncertainty
Implied demand uncertainty also related
to customer needs and product attributes
First step to strategic fit is to understand
customers by mapping their demand on
the implied uncertainty spectrum
Predictable supply & uncertain
demand or uncertain supply &
pred. demand or somewhat Highly uncertain
Predictable supply & demand
uncert. Supply & demand Supply & demand
a market An existing Automobile model A new commu
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12
Implied Demand
Customer Need
Uncertainty
Causes Implied Demand
Uncertainty to ……..
Range of Quantity Increases. Larger Demand . Larger
required increases Variance
Lead Time Decreases Increases. Less time to react to orders
Variety of products Increases. Demand per product
required increases becomes more disaggregate
Number of channels Increases. Total customer demand is
through which disaggregated over more channels
product may be
acquired increases
Rate of innovation Increases. New products tend to have
increases more uncertain demand
Required service Increases. Firm has to handle unusual
level increases surges in demand
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Implied Supply uncertainty
by supply source capability
Supplier source Causes supply
capability uncertainty to…..
Frequent Breakdowns Increase
Unpredictable & low Increase
yields
Poor Quality Increase
Limited supply Increase
capability
Inflexible supply Increase
capability
Evolving
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production Increase 14
Achieving Strategic Fit
Understanding the Customer
Lot size
Response time
Implied
Service level
Demand
Product variety Uncertainty
Price
Innovation
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Levels of Implied
Demand Uncertainty
Detergent High Fashion
Long lead time steel Mobile phones
Purely functional products Entirely new products
Customer Need
Price Responsiveness
Low High
Implied Demand Uncertainty
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Step 2: Understanding
the
Supply Chain
Capabilities
How does the firm best meet demand?
Dimension describing the supply chain is
supply chain responsiveness
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: cost-responsiveness efficient frontier
Figure: 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: Cost-
Responsiveness Efficient
Responsiveness
Frontier
High
It is lowest possible cost for given level
of responsiveness . Not every firm can operate
Low
Cost
High Low
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Step 3: Achieving
Strategic Fit
Step is to ensure that what the
supply chain does well is consistent
with target customer’s needs
Fig. : Uncertainty/Responsiveness
map & Zone of strategic fit
Examples: Dell, 7-11
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Dell case
Customized PC’s in several days
High innovation & rapid delivery so
high implied demand uncertainty
Supply uncertainty for new products
as well
Needs responsive supply chain to
match competitive strategy
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Responsiveness
Spectrum
Highly Somewhat Somewhat Highly
efficient efficient responsive responsive
Integrated Hanes Most
Dell-
steel mill- Apparel- automotive
•customized
•Less variety •Make to stock Production-
•Advanced Prod. •Prod. Lead time •Large variety
Schedule Is high •responsive
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4 basic Manufacturing
Strategies
Design Purchase Manuf Assemble Ship Engineer to order
Inv. Manuf. Assemble Ship
Make to order
Manuf. Inv. Assemble Ship
Assemble to order
Manuf. Assemble Inv. Ship Make to stock
Delivery Lead time
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Create scenarios for agri-based supply
chain , just like the one’s for
manufacturing scenario
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Achieving Strategic Fit
Shown on the
Uncertainty/Responsiveness
Responsive
supply chain Map
Responsiveness e o f it
n F
spectrum Zo egic
t
t ra
S
Efficient
supply chain
Certain Implied Uncertain
demand uncertainty demand
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spectrum 25
Step 3: Achieving
Strategic Fit
All functions in the value chain must support the
All functions in the value chain must support the
competitive strategy to achieve strategic fit
Two extremes: Efficient supply chains (steel mills)
and responsive supply chains (Dell)
Goal is to target high responsiveness for SC’s facing
high implied demand uncertainty, and efficiency for
SC’s with low implied demand uncertainty
Two key points
there is no right supply chain strategy
independent of competitive strategy
there is a right supply chain strategy for a given
competitive strategy
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Comparison of Efficient
and Responsive Supply
Chains Responsive
Efficient
Primary goal Lowest cost Quick response
Product design Min product cost Modularity to allow
strategy postponement
Pricing strategy Lower margins Higher margins
Mfg strategy High utilization Capacity flexibility
Inventory strategy Minimize inventory Buffer inventory
Lead time Reduce but not at Aggressively reduce
strategy expense of greater even if costs are
cost significant
Supplier selection Cost and low Speed, flexibility,
strategy quality quality
Transportation Greater reliance on Greater reliance on
strategy low cost modes responsive (fast)
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modes
Channel Design
Characteristics
Supply Chain Channel design
Type Characteristics
Efficient Supply •Economical production runs
Chain •Finished goods inventories
•Economical buy quantities
Make-to -Stock •Large shipment sizes
•Batch order processing
Responsive supply •Excess capacity
chain •Quick Changeovers
•Short lead-times
Make-to-order •Flexible processing
•Premium transportation
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Tailoring SC for handling Imp.
Uncert.
Low Implied uncertainty absorbed α high efficiency
Can be located in low cost countries
Supplier Manufacturer Retailer IKEA- Swedish
Extent of Implied Uncertainty for the Supply Chain
Supplier Manufacturer Retailer England Inc.
Uses FMS
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Competitive Changes
Over Time
Competitive pressures can change over
time
More competitors may result in an
increased emphasis on variety at a
reasonable price
The Internet makes it easier to offer a
wide variety of products
The supply chain must change to meet
these changing competitive conditions
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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:
Intracompany intraoperation scope
Intracompany intrafunctional scope
Intracompany interfunctional scope
Intercompany interfunctional scope
Flexible interfunctional scope
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Strategic Scope
Suppliers Manufacturer Distributor Retailer Customer
Competitive
Strategy
Product Dev.
Strategy
Supply Chain
Strategy
Marketing
Strategy
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Intracompany
Intraoperational Scope
One operation within a functional area
in a company
Each operation within each stage of the
supply chain devises a strategy
independently and attempts to optimize
its own performance independently
Usually results in different operations
having conflicting objectives – does not
maximize total supply chain profits
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Strategic Scope:
Intracompany
Intraoperation Scope
Suppliers Manufacturer Distributor Retailer Customer
Competitive
Strategy
Product Dev.
Strategy
Supply Chain
Strategy
Marketing
Strategy
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Intracompany
Intrafunctional Scope
Strategic fit is expanded to include
all operations within a function
Attempt to maximize performance
for the entire function
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Strategic Scope:
Intracompany
Intrafunctional
Suppliers Manufacturer Distributor
Scope
Retailer Customer
Competitive
Strategy
Product Dev.
Strategy
Supply Chain
Strategy
Marketing
Strategy
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Intracompany
Interfunctional Scope
All functional strategies within a
company are developed to support
each other and the company’s
competitive strategy
Strategic fit is expanded to include
all functions in a firm
Goal is to maximize company profit
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Strategic Scope:
Intracompany
Interfunctional
Suppliers Manufacturer Distributor
Scope
Retailer Customer
Competitive
Strategy
Product Dev.
Strategy
Supply Chain
Strategy
Marketing
Strategy
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Intercompany
Interfunctional Scope
The only positive cash flow for the supply
chain occurs when the customer pays for the
product –
all other cash flows are resettling of accounts
within the chain and add to total supply chain
cost
Supply chain surplus
Difference between what the customer pays and
total supply chain cost
Total profit to be shared among all members of the
supply chain
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Intercompany
Interfunctional Scope
Increasing supply chain surplus increases
the amount to be shared
All stages coordinate strategy across all
functions to ensure that they best meet the
customer’s needs and maximize supply
chain surplus
Also provides more speed by managing the
interfaces between supply chain stages
Each company must evaluate its actions in
the context of the entire supply chain
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Strategic Scope:
Intercompany
Interfunctional
Suppliers Manufacturer Distributor
Scope
Retailer Customer
Competitive
Strategy
Product Dev.
Strategy
Supply Chain
Strategy
Marketing
Strategy
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Flexible Intercompany
Interfunctional Scope
Ability to achieve strategic fit when
partnering with stages that change
over time in the supply chain
Customer needs and members of the
supply chain change over time
A firm may have to partner with
many different firms over time
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Important Logistic
Strategies in SCM
Differentiated Distribution
Postponement
Consolidation
Standardization
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Differentiated
Distribution
Not all products should be provided the same
customer service level.
Multiple distribution strategies should be
provided within the product line
Classify products in high , medium & low
sales volume then apply different stocking
level to each
Also applicable to inventory location
Fast moving in field warehouses, Medium in
regional locations & Slow in Centralized
locations ( ABC analysis can be used)
Also separate distribution channels for
regular & back orders.
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Postponement
The time of shipment and the location of final
product processing in the distribution of a product
should be delayed until its customer order is
received.
Asian Paints retail paint stores create an endless
variety of colors for customers by mixing pigments
in relatively few base colors, rather than stocking
all colors ready mixed (form postponement)
SW, a manufacturer of graphical software,
developed its products at its U.S. headquarters. To
save on transportation and Inventory costs, it
shipped master copies of the software to Europe
for Duplication and final customization for that
market.
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Types of Postponement
Type of Potentially Interested Firms
Postponement
Labeling Firms selling a product under several brand
names
Firms with high unit value of products
Firms with high product value fluctuations
Packaging Firms selling a product under several package
sizes
Firms with high unit value products
Firms with high product sales fluctuations
Assembly Firms selling products with several versions
Firms selling product whose size reduces when
unassembled
Firms with high unit value products
Firms with high product sales fluctuation
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Manufacturing Firms selling prods. with high proportion of
Consolidation
Creating large shipments from small ones
Economies of scale are achieved that are
present in transport cost-rate structure
Wal Mart has mastered this art
It has consolidation points where full
loads of a single product are
disaggregated and then various products
are aggregated in a single truck to
replenish the retail outlets
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Standardization
Large variety adds up a new assembly line
Even though demand may remain same
Use of interchangeable parts, modularizing
products, and labeling the same products
under different brand names
Eg: Automobile manufacturers create
endless product variety without increasing
inventories by adding or substituting
options at point of sales ( POS) and
creating multiple brands from the same
basic component.
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Summary of Learning
Objectives
Types of functional strategies
Importance of fit between
Competitive strategy & SC strategy
Steps in achieving strategic fit
Expanding scope of strategic fit
Few important strategies in SC
logistics
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