Corporate Strategy
and its Connection to
Supply Chain Management
Fit Between Corporate and Functional
Strategies (Chopra & Meindl)
Corporate Competitive Strategy
Product
Development
Strategy
Supply Chain
or Operations
Strategy
Information Technology Strategy
Finance Strategy
Human Resources Strategy
Marketing
and Sales
Strategy
Corporate Mission
• The mission of the organization
–
–
–
–
defines its purpose, i.e., what it contributes to society
states the rationale for its existence
provides boundaries and focus
defines the concept(s) around which the company can rally
• Functional areas and business processes define their
missions such that they support the overall corporate
mission in a cooperative and synergistic manner.
Corporate Mission Examples
• Merck: The mission of Merck is to provide society with superior
products and services-innovations and solutions that improve the
quality of life and satisfy customer needs-to provide employees with
meaningful work and advancement opportunities and investors with a
superior rate of return.
• FedEx: FedEx is committed to our People-Service-Profit philosophy.
We will produce outstanding financial returns by providing totally
reliable, competitively superior, global air-ground transportation of
high-priority goods and documents that require rapid, time-certain
delivery. Equally important, positive control of each package will be
maintained utilizing real time electronic tracking and tracing systems.
A complete record of each shipment and delivery will be presented
with our request for payment. We will be helpful, courteous, and
professional for each other, and the public. We will strive to have a
completely satisfied customer at the end of each transaction.
Defining the Corporate Strategy
Responsiveness (Reliability; Quickness; Flexibility;
e.g., Dell, Overnight Delivery Services)
Competitive Advantage through which
the company market share is attracted
Cost Leadership (Price;
e.g., Wal-Mart, Southwest
Airlines, Generic Drugs)
Differentiation (Quality; Uniqueness;
e.g., Luxury cars, Fashion Industry,
Brand Name Drugs)
Defining the Corporate Strategy
• Corporate Strategy: The organization’s positioning in terms of
– responsiveness,
– cost leadership and
– product differentiation
requirements, i.e., the sought competitive advantage(s).
• The corporate strategy dictates the detailed strategies for each
functional area (i.e., Operations, Finance, Marketing) but it is also
affected by those areas.
• Collectively, all these strategies seek to exploit (external) opportunities
and (internal) strengths, neutralize (external) threats, and address
(internal) weaknesses
Factors affecting Corporate Strategy
• External
– Emerging strengths and weaknesses of competitors => new threats
and opportunities, respectively
– New industry entrants
– Development of substitute products
– Development of new technologies
– Legal developments (e.g., environmental concerns and regulations)
– Economic and political developments (e.g., new international
agreements, political crises)
• Internal
– Company politics and restructuring
– Modified relationships with customers and suppliers
– Product Life Cycle
Strategy and Issues during a Product’s Life
(J. Heizer & B. Render, “Operations Management”, Prentice Hall)
Introduction
• Best period to
increase market
share
•R&D engineering
critical
Growth
•Practical to
change price or
quality image
•Strengthen
niche
Maturity
•Poor time to change
image, price or
quality
•Competitive costs
become critical
•Defend market
position
Decline
•Cost control
critical
Sales
Time
• Frequent product
and process
changes
•Short production
runs
•High production
costs
•Limited models
•Attention to
quality
•Forecasting
critical
•Products and
process reliability
•Increase capacity
•Shift towards
product focus
•Enhance
distribution
•Standardization minor product
changes
•Optimum capacity
•Process stability
•Long production
runs
•Little product
differentiation
•Overcapacity in
the industry
•Reduce capacity
and eventually
prune line to
eliminate items not
returning good
margin
The “zone of strategic fit”
(adapted from Chopra & Meindl)
Responsive
Supply Chain
Responsiveness
Spectrum
Efficient
Supply Chain
Certain
Demand
Implied
Uncertainty
Spectrum
Uncertain
Demand
Implied Demand Uncertainty: The uncertainty that exists due to the portion of
Demand that the supply chain is required to meet.
The operations frontier, trade-offs,
and the operational effectiveness
Responsiveness
Cost Leadership
Differentiation
Expanding the operations frontier:
Dell’s “revolution” in the PC market
• Dell’s competitive advantage: Provide customized PC
configurations, with short delivery times and affordable
prices.
• Dell’s success in PC market:
Supporting Dell’s competitive advantage
through a new operational model
• Focused on strategic partnerships: suppliers down from
200 to 47
• Suppliers maintain nearby ship points; delivery time 15
minutes to 1 hour
• Suppliers own inventory until used in production
• Demand pull throughout value chain – “information for
inventory” substitution
• Demand forecasting is critical – changes are shared
immediately within Dell and with supply base
• Customers frequently steered to “recommended
configurations” with high availability to balance supply
and demand
• External logistics supplier used to manage inbound supply
chain
PC SUPPLY CHAINS
Customer
Customer
Distribution
Channels
PUSH
Manufacturer
Suppliers
Typical PC Supply Chain
(Compaq, HP, IBM, etc.)
Virtual Integration
PULL
PULL
Dell
Suppliers
Dell Supply Chain
PUSH
The CSF’s underlying Dell’s
competitive advantage
• Very high product (configurable) variety – mass
customization!
• Direct fulfillment - no intermediaries
• No production launch until customer order booked (pure
pull!)
• Very low finished goods inventory (costs) – high inventory
turns (raw material inventory influenced by “recommended
configurations”)
• High velocity material flows & fulfillment
Dell performance
Emerging factors and trends enabling
Dell’s strategy
• The commoditization of the PC industry
– Standardized and interchangeable components
– Emergence of reliable manufacturing service providers
• Recent advances in Supply Chain Management
– Information Technology (IT) platforms that allow the effective and
efficient information exchange and coordination across the entire
supply chain
– 3rd party logistics service providers
– Emerging emphasis on virtual rather than vertical company
integration
The primary “drivers” for achieving
strategic fit in Supply Chain Strategy
(adapted from Chopra & Meindl)
Corporate Strategy
Supply Chain Strategy
Efficiency
Facilities
Responsiveness
Inventory
Transportation
Information
Market
Segmentation
The role of Facilities
• Facilities: The locations where inventory is
– processed and transformed into another state (manufacturing) or
– staged before being shipped to the next stage (warehousing)
• In general, centralization boosts efficiency, while decentralization boosts
responsiveness (but not always…)
• Primary decisions:
– Location
•
•
•
•
•
Proximity to the customer
Proximity to resources
Access to markets (ability to circumvent quotas and tariffs)
Infrastructure
Operational costs and tax incentives
– Capacity
• Capital cost vs. responsiveness
– Operations Methodology for Manufacturing Facilities
• Product vs. functional focus
• Flexible vs. dedicated capacity
– Warehousing methodology
• SKU-based storage
• Job lot storage
• Cross-docking
The role of Inventory
• Primary inventory components:
– Raw Material
– Work In Process (WIP)
– Finished Goods
• It exists because of the finiteness of the production and transportation rates
(Little’s Law: I=TH*T)
• Types of Inventory
– Cycle Inventory: It is incurred in an effort to control the impact of “fixed”
ordering and set-up costs.
– Safety Inventory: It is used to deal with the randomness in the experienced
demand; it is set so that it meets the supply chain to meet some “service level”
(i.e., control the probability that no stock-out will be experienced at any
replenishment cycle).
– Seasonal Inventory: It is used to help the supply chain deal with predictable
variability in demand.
– Opportunistic Inventory: Takes advantage of “bargains”.
• Sourcing: Determine the set of suppliers / subcontractors to be used, and
develop the contracts that will govern the relationship.
The role of Transportation
• Transportation: The SC element that moves product between its different
stages.
• Primary decisions:
– Mode(s) of Transportation
•
•
•
•
•
•
Air: fastest but most expensive
Truck: Relatively quick, inexpensive and very flexible mode
Rail: Inexpensive mode to be used for large quantities
Ship: Slowest but often the most economical choice for large overseas shipments
Pipeline: Used (primarily) for oil and gas
Electronic transportation: for goods as music and movies
– Route and Network Selection
– Inhouse or Oursource to some 3PL provider
The role of Information
• Information exchange is necessary for the most extensive modes of
coordination sought in contemporary supply chains. It allows the supply chain
to improve simultaneously its efficiency and responsiveness.
• Information-related decisions
–
–
–
–
–
Push vs. pull
Extent and modes of information sharing and coordination
Forecasting and Aggregate Planning schemes
Pricing and revenue management policies
Enabling Technologies:
• Electronic Data Interchange (EDI): Enables paperless transactions, primarily for
“backend” operations of the SC.
• The Internet and the WWW.
• Enterprise Resource Planning (ERP): enables transactional tracking and global visibility
of information in the SC.
• Supply Chain Management (SCM) software: decision support tools.
Current Trends and Challenges in the SCM
•
•
•
•
Increasing variety of products
Decreasing product life cycles
Increasingly demanding customers
Fragmentation of Supply Chain Ownership: vertical vs. virtual
integration
• Globalization and Market Segmentation
• “Closed Loop” SC
Production
Disposal
Distribution
Disassembly/
Reprocessing
Consumption
Retrieval
Reverse Logistics and
Re-manufacturing network