Fall, 2014 Supply Chain Management: Strategy, Planning, and Operation Chapter 2 Byung-Hyun Ha

Outline

Competitive and supply chain strategies

Achieving strategic fit

Expanding strategic scope

Obstacles to achieving strategic fit
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Competitive and Supply Chain Strategies

Competitive strategy (of an organization)
 Defines the set of customer needs a firm seeks to satisfy through its products and services, relative to its competitor 
Examples
 Wal-Mart • • High availability of variety of products of reasonable quality Low price  McMaster-Carr (MRO) • More than 500,000 different products (through a catalog and Web) • Convenience, availability, responsiveness • Not competing based on low price  Blue Nile vs. Zales 2

Competitive and Supply Chain Strategies

Functional 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 • Supplier strategy, operations strategy, logistics strategy 
Consistency & support!
Finance, Accounting, Information Technology, Human Resources
Value Chain
New Product Development Marketing and Sales Operations Distribution Service
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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 • e.g., Dell’s competitive strategy before and after 2007 
Three basic steps to achieve strategic fit
   Step 1: Understanding the customer and supply chain uncertainty Step 2: Understanding the supply chain Step 3: Achieving strategic fit 4

How is Strategic Fit Achieved?

Step 1: Understanding the customer and supply chain uncertainty
 Identify the needs of the customer segment being served • • • • • • 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  Understanding the customer • • Demand uncertainty 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 5

How is Strategic Fit Achieved?

Step 1: Understanding the uncertainty (cont’d)
 Impact of customer needs on implied demand uncertainty
Customer Need
Range of quantity required increases Lead time decreases Variety of products required increases Number of channels through which product may be acquired increases Rate of innovation increases Required service level increases
Causes implied demand uncertainty to increase because …
Wider range of quantity required implies greater variance in demand Less time to react to orders Demand per product becomes more disaggregated Total customer demand is now disaggregated over more channels New products tend to have more uncertain demand Firm now has to handle unusual surges in demand 6

How is Strategic Fit Achieved?

Step 1: Understanding the uncertainty (cont’d)
 Correlation between Implied demand uncertainty and other Attributes
Attribute
Product margin Avg. forecast error Avg. stockout rate Avg. forced season-end markdown
Low Implied Uncertainty
Low 10% 1%-2% 0%
High Implied Uncertainty
High 40%-100% 10%-40% 10%-25% 7

How is Strategic Fit Achieved?

Step 1: Understanding the uncertainty (cont’d)
 Supply uncertainty • Uncertainty resulting from the capability of the supply chain  Impact of supply source capability on supply uncertainty
Supply Source Capability
Frequent breakdown Unpredictable and low yields Poor quality Limited supply capacity Inflexible supply capacity Evolving production process
Causes Supply Uncertainty to ...
Increase Increase Increase Increase Increase Increase 8

How is Strategic Fit Achieved?

Step 1: Understanding the uncertainty (cont’d)
 Levels of implied demand uncertainty Predictable supply and demand Predictable supply and uncertain demand or uncertain supply and predictable demand or somewhat uncertain supply and demand Highly uncertain supply and demand Salt at a supermarket An existing automobile model A new communication device
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How is Strategic Fit Achieved?

Step 2: Understanding the supply chain
 How does the firm best meet demand in uncertain environment?
 Supply chain responsiveness • • • • • • 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 Handle supply uncertainty  
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 10

How is Strategic Fit Achieved?

Step 2: Understanding the supply chain
 Cost-responsiveness efficient frontier
High
Responsiveness
Low High
Cost
Low
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How is Strategic Fit Achieved?

Step 2: Understanding the supply chain
 Responsiveness spectrum • e.g., Seven Eleven Japan, Sam’s Club
Highly efficient
Integrated steel mill
Somewhat efficient
Hanes apparel
Somewhat responsive Highly responsive
Most automotive production Dell 12

How is Strategic Fit Achieved?

Step 3: Achieving strategic fit
 Match supply chain responsiveness with implied uncertainty Zo ne Stra te o f gic F it 13

How is Strategic Fit Achieved?

Step 3: Achieving strategic fit (cont’d)
 Different roles and allocations of implied uncertainty • • One stage more responsive  other stages more efficient e.g., IKEA and England, Inc
supplier manufacturer retailer
Extent of Implied Uncertainty for the Supply Chain
supplier manufacturer retailer
 All functions in the value chain must support the competitive strategy • All functions in supply chain, such as manufacturing, inventory, and purchasing, to be consistent, too 14

How is Strategic Fit Achieved?

Step 3: Achieving strategic fit (cont’d)
 Comparison of efficient and responsive supply chain Primary goal Product design strategy Pricing strategy Mfg strategy Inventory strategy Lead time strategy Supplier selection strategy Transportation strategy
Efficient
Lowest cost Min product cost Lower margins High utilization Minimize inventory Reduce but not at expense of greater cost
Responsive
Quick response Modularity to allow postponement Higher margins Capacity flexibility Buffer inventory Aggressively reduce even if costs are significant Cost and low quality Greater reliance on low cost modes Speed, flexibility, quality Greater reliance on responsive (fast) modes 15

How is Strategic Fit Achieved?

It sounds easy, but in reality quite difficult!
1. There is no supply chain strategy that is always right 2. There is a right supply chain strategy for a given competitive strategy.

Commitment by top executives!

Other issues affecting strategic fit
 Multiple products and customer segments     Product life cycle Globalization and competitive changes over time Growing supply chain uncertainty Environment and sustainability 16

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 17

Expanding Strategic Scope

Different scope of strategic fit across supply chain Competitive Strategy Product Development Strategy Supply Chain Strategy Marketing Strategy Suppliers Manufacturer Distributor Retailer Customer
Intercompany Interfunctional Intracompany Interfunctional at Distributor Intracompany Intrafunctional at Distributor Intracompany Intraoperation at Distributor
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Obstacles to Achieving Strategic Fit

Increasing variety of products

Decreasing product life cycle

Increasing Demanding customers

Fragmentation of supply chain ownership

Globalization

Changing business environment

Difficulty executing new strategies
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