Supply Chain Management
Supply Chain Performance:
Achieving Strategic Fit and Scope
Outline
Competitive and supply chain strategies
Achieving strategic fit
Competitive and Supply
Chain Strategies
Competitive strategy: defines the set of customer
needs a firm seeks to satisfy through its products and
services, relative to its competitors.
– Wallmart – low price, product availability
– Dell – Customization and variety
Priories of the customer is the determining factor in
competitive strategy.
Competitive and Supply
Chain Strategies
Supply chain strategy:
– Determines the nature of material procurement,
transportation of materials, manufacture of product or
creation of service, distribution of product.
– Determines the broad structure, what the processes within
company must focus “to do well”, and what roles each
entity in the supply chain should play.
– Supply chain strategy is simply the collection of the
strategies for new product development, marketing,
operations, distributions, and service.
– Consistency and support between supply chain strategy,
competitive strategy, and other functional strategies is
important.
Example; 7- Eleven Japan
A chain of small stores selling groceries and variety of
products and services.
Competitive strategy; convenience and easy access to
stores, availability of variety of products and services
(like bill payment).
Supply chain strategy; emphasizing the convenience
and variety in marketing, high density of stores,
excellent information system, very responsive
forecasting and inventory management system,
flexible distribution system in delivery schedules.
Example- Dell
Competitive strategy; Customization and variety at
reasonable price.
Supply chain strategy; broad structure-direct sale to
customer, built-to-order system to achieve the
customization and variety, using internet (or phone)
and e-business for customization, no finished product
inventory, low component inventories, close relations
and information sharing with suppliers for speedy
delivery and reduced defects, using parcel carriers for
speedy delivery, a few assembly plants for economies
of scale in production.
Example –Wall Mart
Competitive strategy; high availability of variety of
reasonable quality products at low price.
Supply chain strategy; frequent replenishment to
stores, distribution depots close to store, uses its own
fleet for transportation, cross docking strategy at
depots, close collaboration and information sharing
with its suppliers using their excellent information
system.
Achieving Strategic Fit
Introduction
How is strategic fit achieved?
Other issues affecting strategic fit
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 should have the same goals
– All functional strategies that make up the supply chain
strategy must be aligned
 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; Marketing is publicizing product variety and quick delivery
while distribution is aiming for low cost means of transportation. (slow
modes of transportation, order consolidations)
DELL example for strategic fit
Competitive strategy; Customization and variety
Supply chain strategy;
– Two extreme options;
» Efficient supply chain for low cost products (consolidated
production and distribution, dedicated production capacity, limited
variety, slow modes of distribution, standard products etc.)
» Responsive supply chain; Flexible production capacity, fast
distribution options, product variety, designing easily customizable
products with as many as possible common components)
– Second option of course better fits with competitive strategy
of Dell.
How is Strategic Fit Achieved?
Step 1: Understanding the customer and supply chain
uncertainty
Step 2: Understanding the supply chain
Step 3: Achieving strategic fit
Step 1: Understanding the Customer
and Supply Chain Uncertainty
Identify the needs of the customer segment being served
– A customer who usually buys detergent from a convenience
store v.s. A customer who goes to Metro and buy detergent in
larger quantities at cheaper price?
– Emergency repair needs v.s. Construction related orders?
– What are the characteristics of these types of customers?
In general customer demand varies in the following
attributes;
–
–
–
–
–
–
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
We will try to combine all of these attributes in one
metric; implied demand 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.
First step to strategic fit is to understand customers by
mapping their demand on the implied uncertainty
spectrum
Achieving Strategic Fit
Understanding the Customer
–
–
–
–
–
–
–
Lot size
Response time
Service level
Product variety
Price
Innovation
Demand channels
Implied
Demand
Uncertainty
Impact of Customer Needs on Implied
Demand Uncertainty (Table 2.1)
Customer Need
Causes implied demand
uncertainty to increase because …
Range of quantity increases
Wider range of quantity implies
greater variance in demand
Lead time decreases
Less time to react to orders
Variety of products required increases Demand per product becomes more
disaggregated
Number of channels increases
Total customer demand is now
disaggregated over more channels
Rate of innovation increases
New products tend to have more
uncertain demand
Required service level increases
Firm now has to handle unusual
surges in demand
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
Salt at a
supermarket
An existing
automobile
model
Highly uncertain
supply and demand
A new
communication
device
Figure 2.2: The Implied Uncertainty (Demand and Supply)
Spectrum
Correlation Between Implied Demand
Uncertainty and Other Attributes
Attribute
Product margin
Low Implied
Uncertainty
Low
High Implied
Uncertainty
High
Avg. forecast error
10%
40%-100%
Avg. stock out rate
1%-2%
10%-40%
Step 2: Understanding the
Supply Chain
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
Handle supply problems (yield, untimely delivery of
components, breakdowns etc.)
Step 2: Understanding the
Supply Chain
There is a cost to achieving responsiveness
Increasing responsiveness results in higher costs that
lower efficiency
Second step to achieving strategic fit is to map the
supply chain on the responsiveness spectrum
Responsiveness Spectrum
(Figure 2.4)
Highly
efficient
Integrated
steel mill
Advance
Production
Schedules,
Less variety
and flexibilty
Somewhat
efficient
Hanes
Apparel
Make to stock
manufacurer
with
a lead time in
weeks
Somewhat
responsive
Most
automotive
Production
Variety of
products
delivered in
weeks
Highly
responsive
Seven-Eleven
Japan
Variety of
products by
locaiton and by
the time of the
day, quick
replenishments
Examples
 Responsive supply chains;
– 7 Eleven- Japan; ,
» variety of products; replenishes stores three times a day, with breakfast
items, lunch items, and dinner items, provide different services.
» Short lead times; a store is replenished in less then 12 hours after the store
manager gives an order.
– Dell
» Variety of products; customers designs their own PCs.
» Short lead times; uses parcel carriers for transportation to deliver a PC to
the customer in a week on the average.
 Efficient supply chain;
– BİM stores
» Less workers at stores, less promotional costs, displaying products in boxes
rather than stacking them on shelves, limited variety (about 600),
reasonable quality products, stores not on main streets but in secondary
places to keep the costs down.
Step 3: Achieving Strategic Fit
 Step is to ensure that what the supply chain does well (supply
chain strategy) is consistent with target customer’s needs
(competitive strategy)
 Fig. C: Zone of strategic fit
 Examples:
– Dell; High implied demand uncertainty and responsive supply chain
– Barilla (Italian pasta manufacturer); Low level of demand uncertainty
and efficient supply chain
Achieving Strategic Fit Shown on the
Uncertainty/Responsiveness Map (Fig. C)
Responsive
supply chain
Responsiveness
spectrum
Efficient
supply chain
Certain
demand
Implied
uncertainty
spectrum
Uncertain
demand
Step 3: Achieving Strategic Fit
 In achieving strategic fit, different levels in the supply chain
can be assigned different responsiveness and efficiency.
 Examples;
– IKEA; Swedish furniture retailer
» Targets customer who wants stylish furniture at reasonable price
» Limited variety to reduce the supply uncertainty
» Large stores where all styles are stocked and customer demand is satisfied
from stocks.
» Stable and predictable orders to its manufacturers located in low-cost
countries.
» Responsiveness provided by the stocks in store that absorbs the demand
uncertainty.
» Manufacturers can be efficient because of stable and predictable
Step 3: Achieving Strategic Fit
 Example;
– England Inc.; Furniture manufacturer in Tennessee
– England manufactures and delivers thousand of sofas and chairs to
orders with three weeks lead time.
– England’s retailers let customer to select from variety of products with a
promise of quick delivery. Retailers carry little inventory
– All the uncertainty is passed to England Inc. And Retailers can be
efficient
– England Inc. can either hold high levels of raw material inventories to
absorb the uncertainty and chose not to be efficient and allows its
suppliers to be efficient, or passes all the uncertainty to its suppliers by
holding low levels of raw materials and England itself works efficiently.
Step 3: Achieving Strategic Fit
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
Comparison of Efficient and
Responsive Supply Chains
Efficient
Responsive
Primary goal
Lowest cost
Quick response
Product design strategy
Min product cost
Room to allow
postponement
Pricing strategy
Lower margins
Higher margins
Mfg strategy
High utilization
Capacity flexibility
Inventory strategy
Minimize inventory
Buffer inventory
Lead time strategy
Reduce but not at expense
of greater cost
Aggressively reduce even if
costs are significant
Supplier selection strategy
Cost and low quality
Speed, flexibility, quality
Transportation strategy
Greater reliance on low cost
modes
Greater reliance on
responsive (fast) modes