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Supply Chain Management:

Strategic Fit and Scope

(Source: Supply Chain Management, Strategy, Planningand Operation, By Sunil Chopra, Peter Meindl, D. V.

Kalra‐Pearson)

For academic purpose and private circulation only

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Competitive strategy

Competitive strategy defines, relative to itscompetitors, the set of customer needs a firm seeks tosatisfy through its products and services.

Competitive strategy is defined based on how the customer

prioritizes product cost, delivery time, variety and quality.

WalMart & Seven Eleven Japan

WalMart: Low price , product availability, variety

Seven Eleven: Convenience, availability and responsiveness

Blue Nile (online diamond retailing model), Zales (Diamond retail stores)

Blue Nile – low cost, variety

Zales – responsiveness, help in product selection

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Competitive strategy of a firm will be defined bycustomers priorities.

Competitive strategy targets one or more customersegments and aims to provide products and servicesthat satisfy customer needs.

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The Value Chain for a typical organisation

To execute a company’s competitive strategy, various functions

in a firm play a role and each develops its own strategy.

Supply chain strategy defines broad structure of supply chain

and includes long term decisions regarding facilities,

transportation, outsourcing etc.

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All functional strategies as well as supply chainstrategy must support one another and thecompetitive strategy.

E.g. Seven Eleven Japan success can be attributed to excellentfit among functional strategies including supply chain strategy.

Marketing strategy- convenience, product availability, variety.

Product development strategy: exploits frequent customer visits to stores, make use of existing infrastructure

Operations and distribution strategy: focuses on high densityof stores, very responsive, excellent information networks

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Achieving Strategic Fit

Strategic fit

• It requires that both competitive and supply chain strategies have

aligned goals.

• It refers to the consistency between the customer priorities

that the competitive strategy hopes to satisfy and thesupply chain capabilities that the supply chain strategy

aims to build.

• A company may fail because of a lack of strategic fit i.e supply

chain do not provide the capabilities to support the desired

strategy fit.

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Dell and its Supply Chain1993-2006:

Competitive strategy was to provide large variety of customisedproducts at reasonable price.

With focus on customisation, Dells supply chain focus wasdesigned to be very responsive.

Assembly facilities were designed to be flexible rather thanfocussing on low cost and producing large volumes.

Dell PCs were designed to use common components and allowrapid assembly.

Dell was able to produce customised products with lowinventory.

Because of low inventory, suppliers and carriers were highly

responsive. 4-7


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2007 onwards:

Changed its competitive strategy and supply chain

While it continued to offer customisation, it also started

selling PCs through retail stores like Wal-Mart. In retail sales, focus is on low cost as against customisation

in Direct Sales Channel

Changes were made in earlier flexible and responsive

supply chain that satisfied customisation Dell increased contract manufacturing in low cost

countries. Also increased inventory levels.

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Steps in Achieving Strategic Fit

•

To achieve strategic fit, a company must ensure that itssupply chain capabilities support its ability to satisfy the

needs of targeted customer segments.

• Three basic steps in achieving strategic fit are:

1. Understanding the customer needs and uncertainty

faced by supply chain 2. Understanding the supply chain

3. Achieving strategic fit

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Understanding the customer and supply chain uncertainty

To understand the customer, a company must identify theneeds of the customer segment being served.

Each customer in a particular segment will tend to havesimilar needs, whereas customer in different segments canhave different needs.

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d di h d l h i i

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Company must also understand uncertainity these needsimpose on the supply chain.

E.g. For the same product, demand varies along certainattributes for customer making a purchase at:

Seven Eleven- Customer need of convenience

Wall-Mart- Customer need of low cost

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Understanding the customer and supply chain uncertainty

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Step 1: Understanding the Customer and Supply Chain

Uncertainty

Customer Demand from different segments variesalong several attributes:

• Quantity of product needed in each lot

• Response time customers will tolerate

• Variety of products needed

• Service level required (e.g. high product availability)

•

Price of the product• Desired rate of innovation in the product

Above are the attributes of demand along which demand

may vary giving rise to demand uncertainty.

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Step 1: Understanding the Customer and Supply Chain

Uncertainty

• One key measure which combines different attributes of

the demand is “Implied demand uncertainty”

•

It is the resulting uncertainty for only the portion of thedemand that the supply chain plans to satisfy and handle

based on the attributes the customer desires.

• It is the demand uncertainty imposed on the supply chainbecause of the customer needs it seeks to satisfy.

• e.g. a firm supplying emergency orders for a product will face a higher

implied demand uncertainty than a firm supplying the same product

with long lead time

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Customer Needs and Implied Demand Uncertainty

Customer Need Causes Implied Demand Uncertainty to …

Range of quantity required increases Increase because a wider range of the quantity requiredimplies 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 moredisaggregate

Number of channels through whichproduct may be acquired increases

Increase because the total customer demand is nowdisaggregated over more channels

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

Required service level increases Increase because the firm now has to handle unusual surgesin demand (but the underlying demand uncertainty may notchange)

Table 2-1

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Supply Uncertainty

Supply Source Capability Causes Supply Uncertainty to...

Frequent breakdowns Increase

Unpredictable and low yields IncreasePoor quality Increase

Limited supply capacity Increase

Inflexible supply capacity Increase

Evolving production process Increase

Table 2-3

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Thus uncertainty from customer (implied demanduncertainty) and supply chain (supply uncertainty) can be

combined on an implied uncertainty spectrum.

Implied uncertainty is the uncertainty which a company faces in achieving a strategic fit between competitive

strategy and supply chain strategy.

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Implied Uncertainty

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Levels of Implied Uncertainty (Demand and Supply)

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Step 2: Understanding Supply Chain Capabilities

•

Creating a strategic fit requires creating a supply chain strategy that best meets the demand a company has targeted given the

uncertainty.

• This requires understanding and building capabilities /

characteristics in the supply chain

• Supply chain responsiveness : It 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 very high service level

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• Responsiveness comes at a cost e,g, to wide ranges of

quantities demanded shall require high capacity.

• Supply chain efficiency is the inverse of the cost of making and delivering the product to the customer.

• Increases in cost lowers the efficiency.

• For every strategic choice to increase responsiveness, there

are additional costs that lower efficiency.

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Cost-Responsiveness Efficient Frontier

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The cost-responsiveness efficient frontier curve shows thelowest possible cost for a given level of responsiveness.

It represents the cost-responsiveness performance for thebest supply chains.

It shows trade-off between responsiveness and costs.

Supply chains range from those that focus solely on beingresponsive to those that focus on producing and supplying

at low cost.

Thus a key strategic decision for a company is to mapit on responsiveness spectrum i.e. choose the level of responsiveness it seeks to provide.

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Responsiveness Spectrum

Supply chain strategy is the find the correct balance between

“responsiveness” and “efficiency” that fits the competitive

strategy.

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Step 3: Achieving Strategic Fit

• Ensure that the degree of supply chain responsiveness isconsistent with the implied uncertainty.

• Goal is to target high responsiveness for a supply

chain facing high implied uncertainty and efficiency

for a supply chain facing low implied uncertainty.

•

Increased implied demand uncertainty from customersand supply chain is best served by increasing

responsiveness.

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Zone of Strategic Fit

Companies should move their competitive strategy (andresulting implied uncertainty) and supply chain strategy (and

resulting responsiveness) towards zone of strategic fit

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• For achieving strategic fit, assign roles to different

stages of the supply chain that ensure the

appropriate level of responsiveness.

•

Ensure that all functions maintain consistentstrategies that support the competitive strategy.

• E.g IKEA

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IKEA : a Swedish furniture retailer, Stores in 20 countries

Competitive strategy: Target customers who want stylish furniture withreasonable variety at low prices.

• Supply Chain Strategy:

Limits variety of furniture style through modular design, products easy to assemble. Modular design of products allow moving final assembleto customer.

Have large stores with large inventory, stocks all styles in stores andserves customer through stock.

Manufacturers produces large volumes of few modules and focus on

efficiency.

Transportation focuses on shipping large quantities of unassembled

modules at low cost o large stores.

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Large stores allow replenishment orders to its manufacturers to bemore stable and predictable. Hence large stores inventory and modular design decreases the implied demand uncertainty faced bysupply chain.

Stores inventory absorb most of the implied uncertainty and passeslittle uncertainty to manufacturers.

Manufacturers are located in low-cost countries and focus onefficiency.

Thus IKEA provides responsiveness in supply chain with the storesabsorbing most of the uncertainty and being responsive.

Manufacturers and suppliers absorb little uncertainty and are efficient.

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England Inc : a furniture manufacturer

Manufactures sofas, chairs etc to order and deliver them furniturestores across the country within 3 weeks.

Large variety and promise of quick delivery imposes high implieddemand uncertainty on supply chain.

Retailers do not carry much inventory and hence pass on implied

uncertainty to manufacturer.

Thus retailer can be efficient because of less implied uncertainty facedby them.

Manufacturers have flexible manufacturing process to absorb implieddemand uncertainty and be responsive.

Manufacturer hold more raw material inventory and supplier focus onefficiency.

If manufacturer decreases its raw material inventory, then suppliermust become more responsive.

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R l d All ti

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Roles and Allocations

Supply chain can achieve a given level of responsiveness andefficiency by adjusting roles of each stage. Making one stagemore responsive allow other stage to become more efficient.

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Efficient and Responsive Supply Chains

Efficient Supply Chains Responsive Supply Chains

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

Product designstrategy

Maximize performance at a minimumproduct cost

Create modularity to allowpostponement of product differentiation

Pricing strategy Lower margins because price is a prime

customer driverHigher margins because price is not aprime customer driver

Manufacturingstrategy

Lower costs through high utilization Maintain capacity flexibility to buffer

against demand/supply uncertainty

Inventory strategy Minimize inventory to lower cost Maintain buffer inventory to deal with

demand/supply uncertainty

Lead-time strategy Reduce, but not at the expense of costs Reduce aggressively, even if the costs are

significant

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

reliability, and quality

Table 2-4

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Tailoring the Supply Chain

• When supplying multiple customer segments with a wide

variety of products through several channels, a firm musttailor its supply chain to achieve strategic fit.

• E.g. Dell: Built responsive supply chain for customised PCs.

• For low cost channel (e.g for Wall Mart) designed a low cost

supply chain.

• Requires sharing some links in the supply chain with some

products, while having separate operations for other links. (e.g.Various products may be manufactured at the same plant but those products

requiring responsiveness may be shipped by faster mode of transportation like

courier.

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Tailoring the Supply Chain:

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 gainingsales.

Product availability is crucial to capturing the market.

Cost is often a secondary consideration.

In this case responsiveness is the most important

characteristic of supply chain.

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Changes Over Product Life Cycle

• Later stages:

Demand has become more certain, and supply is

predictable.

Margins are lower as a result of an increase in competitivepressure.

Price becomes a significant factor in customer choice.

In this case efficiency is the most important

characteristic of supply chain.

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A Framework for Structuring Drivers

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Expanding Strategic Scope

•

Scope of strategic fit –

the functions within the firmand stages across the supply chain that devise an

integrated strategy with an aligned objective.

• It refers to the supply chain stages across which

strategic fit applies.

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• Intraoperation scope – minimize local cost view

Each stage of the supply chain devises strategy independently

• Intrafunctional scope – minimize 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

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•

Intercompany scope– maximize supply chain surplus

Supplier and customer work together and share

information to reduce total cost and grow supply chain

surplus.

Competitive playing field has shifted from company

versus company to supply chain versus supply chain

• 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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Different Scopes of Strategic Fit Across a Supply Chain

Figure 2-7

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Challenges to Achieving and Maintaining Strategic Fit

• Increasing product variety and shrinking life cycles

Greater product variety and shorter life cycles increase uncertainty

while reducing the window of opportunity within which the supply

chain can achieve fit.

• Globalization and increasing uncertainty

Significant f luctuations in exchange rates, global demand, and the

price of crude oil.

Contd…

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Fragmentation of supply chain ownership

Firms are less vertically integrated

Take advantage of supplier and customer competencies they did

not have

New ownership structure makes aligning and managing the supply

chain more difficult

Aligning all members of a supply chain has become critical to

achieving supply chain fit

Contd…

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• Changing technology and business environment

Customer needs and technology change may force a firm to rethink

their supply chain strategy

• The environment and sustainability Issues of environment and sustainability are growing in relevance

and must be accounted for when designing supply chain strategy

Opportunities may require coordination across different members

of the supply chain

SCM 2 F CHAP 2.pdf

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