Supply chain and competitive
strategy
SCM and competitive advantage
• Effective logistics and supply chain management
can provide a major source of competitive
advantage
– Cost advantage: logistics and scm can increase
efficiency and productivity (leaning curve)
– Value advantage: segmentation (value segments),
service (process of developping relatioships with
customers through the provision of an augmented
offer).
Competitive advantage and the ‘Three Cs’
Customers
Needs seeking benefits at acceptable
prices
Assets and
utilisation
Cost differentials
Company
Source: Ohmae, K., The Mind of the Strategist, Penguin Books, 1983
Assets and
utilisation
Competitor
Supply chain excellence
High
Relative
Differentiation
Low
High
Low
Relative Delivered Cost
Gaining competitive advantage through logistics
Value Advantage
Logistics Leverage Opportunities:
• Tailored service
• Reliability
• Responsiveness, etc
The goal: superior
customer value at
less cost
Cost Advantage
Logistics Leverage Opportunities:
• Capacity utilisation
• Asset turn
• Schedule integration
The supply chain becomes the value chain
• Competitive advantage cannot be understood by
looking at a firm as a whole…
• The value chain disaggregates a firm into
strategically relevant activities in order to
understand the behaviour of costs and the existing
and potential sources of differenciation.
• Implication: organisations should look at each
activity and assess wether they have a real
competitive advantage in the activity. If not, they
should consider outsourcing that activity.
The value chain
Firm infrastructure
Human resource management
Support
activities
Technology development
Inbound
logistics
Operations
Outbound
logistics
Margin
Procurement
Marketing &
sales
Services
Primary activities
Source: Reprinted with the permission of The Free Press, a division of Simon & Schuster, Inc. from Competitive Advantage by Porter, M.E.
Copyright © 1985 by Porter, M. E. All Rights reserved
The supply chain and competitive performance
The supply chain is the network of organizations
that are involved in the different processes and
activities that produce cost and value in the form of
product and services in the hand of the consumer.
Achieving Strategic Fit
• Strategic fit – competitive and supply
chain strategies have aligned 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
Achieving Strategic Fit
1. The competitive strategy and all functional
strategies must fit together to form a coordinated
overall strategy. Each functional strategy must
support other functional strategies and help a firm
reach its competitive strategy goal.
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.
How is Strategic Fit Achieved?
1. Understanding the customer and supply
chain uncertainty
2. Understanding the supply chain
capabilities
3. Achieving strategic fit
Step 1: Understanding the Customer and
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
Step 1: Understanding the Customer and
Supply Chain Uncertainty
• 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 and
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
product may be acquired increases
Increase because the total customer demand per channel
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
TABLE 2-1
Impact of Supply Source Capability
Supply Source Capability
Frequent breakdowns
Causes Supply Uncertainty to...
Increase
Unpredictable and low yields
Increase
Poor quality
Increase
Limited supply capacity
Increase
Inflexible supply capacity
Increase
Evolving production process
Increase
TABLE 2-3
Implied Uncertainty
(Demand and Supply) Spectrum
FIGURE 2-2
Step 2: Understanding 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 2: 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 responsiveness
Cost-Responsiveness Efficient Frontier
FIGURE 2-3
Responsiveness Spectrum
FIGURE 2-4
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 the appropriate
level of responsiveness
• Ensure that all functions maintain
consistent strategies that support the
competitive strategy
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
strategy
Maximize performance at a minimum
product cost
Create modularity to allow postponement
of product differentiation
Pricing strategy
Lower margins because price is a prime
customer driver
Higher margins because price is not a prime
customer driver
Manufacturing
strategy
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
Agile or lean?
High
“Agility” is needed in
less predictable
environments where
the demand for variety
is high.
AGILE
Variety/
Variability
LEAN
Low
Low
High
Volume per variant
“Lean” works best in
high volume, low
variety and predictable
environments.
Demand/supply characteristics determine supply
chain strategy
Long
lead-times
Lean
Plan &
optimise
Hybrid
De-couple
through
postponement
Supply characteristics
Short
lead-times
Kanban
Continuous
replenishment
Agile
Quick response
Predictable
Unpredictable
Demand characteristics
The decoupling point
Lean
Agile
●
Forecast at generic level
●
Demand driven
●
Economic batch quantities
●
Localised configuration
●
Maximise efficiencies
●
Maximise effectiveness
Strategic
Inventory
The agile supply chain
• Market sensitive: supply chain is capable of reading
and responding to real demand (direct feed-back from
the marketplace), instead of forecast driven.
• Virtual: information based rather than inventory based
(e commerce, internet)
• Process alignment: collaborative working between
buyers and suppliers, joint product developement,
common systems and shared information
(cooperation)
• Network based supply chain: individual companies
compete as supply chain
The agile supply chain
Virtual
Market
sensitive
Agile
supply
chain
Network
based
Process
alignment
Route map to the responsive business
Economies of
scale
Synchronized
production
Waste reduction
Lean production
Capacity
management
Vendor
managed
inventory
Standardization/
modularization
Agile
supply
Flexible
response
De-couple the
supply chain
Process management
The Responsive
Business
Organizational
agility
Setup time
reduction
Non-value-adding time
reduction
Quick
response
Demand
driven
Process
re-engineering
Visibility of real
demand
Cross-functional
teams
Continuous
replenishment
programmes
The four pillars of supply chain excellence
Supply Chain
Excellence
Responsiveness
Reliability
Resilience
Relationships
Responsiveness : Time-based competition is now the norm. The focus is on
agility. Organisations must be much more demand-driven than forecastdriven
Reliability : Unreliable processes create uncertainty and variability. Equally,
lack of visibility adds to uncertainty.
Resilience : Today’s turbulent and volatile markets require supply chains
that are capable of dealing with the unexpected and the unplanned.
Relationships : As supply chains become more complex and as outsourcing increases dependency on suppliers, the need for relationship
management increases.
Understanding strategic fit
31
STRATEGIC LEAD TIME
MANAGEMENT
Time is money
• Long lead time means
– Costs: direct relationship between the length of the
logistic pipeline, inventory and inventory costs
– Slower response to customer requirements
• Customers are more and more time-sensitive
• Time sensitive markets:
– Shortening life cycles
– Customers’ drive for reduced inventories
– Volatile markets making reliance on forecasts
dangerous.
Shortening life cycles
• Time-to-market is important
• Once the product is on the market, the ability
to respond quickly to demand is also
important
– Capacity to exploit demand during the life cycle
– When the order-to-delivery cycle is reduced,
companies can have a strong advantage over their
slower competitors.
Shorter life cycles make timing crucial
Market
Sales
Late Entrant
Obsolete
stock
Time
• Less time to make profit
• Higher risk of obsolescence
Customers’drive for reduced inventories
• Companies reduce their inventories:
– Reduced capital and holding costs
– Improved flexibility and responsiveness to their
customers.
• Suppliers are supposed to provide a JIT delivery
service, without carrying the inventory burden
instead of the customer.
• Time compression can enable companies to
break free of the classic trade-off between
service and costs.
Breaking free of the classic service/cost
trade-off
Time compression
Service enhancement
Cost reduction
Volatile markets make reliance on forecasts
dangerous
• Demand volatility is tending to increase due to
customers and competition.
• Very few forecasting methods will be able to
predict short-term changes in demand
• Solutions:
– Increasing the safety stock
– Reducing throughput times.
The concept of lead-time
• Order to delivery (OCT: order cycle time)
– Components of the OCT
• Cash-to-Cash cycle: how long is the pipeline
from the sourcing of raw materials through to
the finished product? The pipeline consume
resources and and needs to finance working
capital.
The order cycle
Customer
places
order
Order
entry
Order
processing
Order
assembly
Transport
Source: Stock, J.R and Lambert, D.M., Strategic: Logistics Management, 2nd edition, Irwin, 1987
Order
received
How long is the logistics pipeline?
Cumulative
Lead-Time
(Procurement
to Payment)
Raw Material Stock
Sub-Assembly Stock
Intermediate Stock
Product Assembly
Finished Stock at Central Warehouse
In-Transit
Regional Distribution Centre Stock
Customer Order Cycle (Order-Cash)
Logistics pipeline management
• Goals of logistics pipeline management:
–
–
–
–
Lower costs
Higher quality
More flexibility
Faster response times.
• How fast does the pipeline add value?
– Increasing the ratio of value-added to cost-added
time
Which activities add cost and which add
value?
Finished
Product
Production
ValueAdded
Time,
Place &
Form
Utility
InTransit
Regional Customer
Order
Stock
Cycle
Raw Material
Stock
Cost-Added
Production, Storage & Transport costs & the Time Cost of Money
Reducing non-value-adding time improves service and
reduces cost
Finished
Stock
Regional
Stock Customer
Delivery
InTransit
Raw Material
Stock
Valueadding
time
Production
Production
Finished
Stock
InTransit
Cost-adding time
Raw Material
Stock
Regional
Stock
Customer
Delivery
SCM as major strategic variable
• Achievement of competitive advantage through excellence
in logistics and supply chain management: logistics and
supply chain management as major strategic variables
• Some companies have invested in developping logistics
capability (Gartner study)
–
–
–
–
–
Demand-driven
Embedded innovation
Close relationships from end-to-end (extended supply chain)
Balanced metrics
Culture (removal of internal silos, pertnering for external
relationships)
– Supply chain talent: developping skills and capabilities
Network competition
• Network organisations: individual businesses no longer
compete as stand-alone entities.
• Virtual organisations: confederation of specialist skills
and capabilities provided by the network members,
collaborative arrangement.
• High level of co-operation between organisations in the
network, creating visibility in the pipeline, integration
– Sharing of information
– Seamless processes
• From a transactional business model to a partnering
business model (developping long-term relationship
based on mutual confidence)
Cost reduction through collaboration
• Gaining internal efficiences….but often simply transferring costs
upstream or downstream
• Cost reduction opportunities through collaboration:
– Transaction costs: costs of placing orders, raisin invoices, confirming
delivery arrangements… can be lowered if barriers to collaboration can
be removed
– Process costs: when suppliers’ processes do not align with those of
their customers (different product codes, different pallet sizes….)
– Uncertainty costs: without supplier/customer communication, safety
stocks are necessary at the interfaces
• Managing the supply chain as a network:
– Collective strategy developement
– Co-operation thinking
– Open communication: advent of IT systems, Open-book accounting
Co-creation in the supply chain
Extended Enterprise
Focus on splitting the pie
Focus on expanding the pie
Value to Customer
Value to Customer
Traditional Relationship
Value to Supplier
Source: J.H. Dyer, Collaborative Advantages
Value to Supplier
Contact :
Nom ou service
Téléphone
Mail