ACHIEVING STRATEGIC FIT
SUPPLY CHAIN DRIVERS
AND OBSTACLES
SUPPLY CHAIN DECISIONS

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Direction and Extent of Vertical Integration
Production/Procurement decisions
Selection of Partners
Nature of Relationships
Facilities Location
Inventory decisions
Transportation decisions
Communications Interface Design Decisions
Supply Chain Strategy


The first step in devising an effective supply-chain
strategy is to consider the nature of the demand for
the products that a company supplies
Functional products



Staples that people buy in a wide range of
retail stores and gas stations
Have stable predictable demand and long
life cycles
Innovative products

Demand is unpredictable

Life cycle is short because imitators erode the
competitive advantage
ROUTES TO VALUE
CREATION

Manufacturing Logistics
– Flexible Production
 Reduced

Costs
Distribution Management
– Speedy Movement to Market
 Increased

Market Share
After Sales Service
– Improved Customer Satisfaction
 Customer
Loyalty
ACHIEVING STRATEGIC FIT


Competitive strategy and all functional strategies
must fit together to from a coordinated overall
strategy. Each functional strategy must support
other functional strategies and help a firm reach
its competitive strategy goal.
The different functions in a company must
appropriately structure their processes and
resources to be able too execute these strategies
successfully.
METHODOLOGY FOR
ACHIEVING STRATEGIC FIT

Understanding the customer

Understanding the supply chain

Achieving strategic fit
UNDERSTANDING THE
CUSTOMER






The quality of product needed in each lot
The response time that customers are
willing to tolerate
The variety of products needed
The service level required
The price of the product
The desired rate of innovation in the
product
DEMAND UNCERTAINTY





Apparent
Implied
Impact on customer needs
Implied uncertainty spectrum
Correlation between implied demand
uncertainty and other attributes
PRODUCT ATTRIBUTES AND DEMAND
UNCERTAINTY
Low
Demand uncertainty
High
Purely
Functional
Products
Established
Goods
New Models
of existing
goods
Entirely
New
Products
Demand more
Certain
Demand
variable
within
limits
Demand
unpredictable
Demand
highly
uncertain
CORRELATION -IMPLIED DEMAND
UNCERTAINTY AND OTHER ATTRIBUTES

Product Margin
 Ave Forecast Error
 Ave Stock out Rate
 Ave forced season end mark down

LOW
LOW IDU
HIGH
HIGH IDU
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
R
E
S
P
O
N
S
I
V
E
N
E
S
S
HIGH
LOW
HIGH
LOW
COST
UNCERTAINTY RESPONSIVENESS
MAP
RESPONSIVE
SUPPLY
CHAIN
RESPONSIVENESS
SPECTRUM
EFFICIENT SUPPLY
CHAINS
IMPLIED UNCERTAINTY
CERTAIN
SPECTRUM
DEMAND
UNCERTAIN
DEMAND
LOGISTICS STRATEGIC
PLANNING
A unified, comprehensive and integrated planning
process to achieve competitive advantage
through increased value and customer service,
which results in superior customer satisfaction
(where we want to be), by anticipating future
demand for logistic services and manufacturing
resources of the entire supply chain (how to get
there).
This planning is done within the context of
corporate goals and plans.
Strategic Planning for Logistics; Ohio State University
FINDING THE ZONE OF
STRATEGIC FIT
RESPONSIVE
SUPPLY
CHAIN
RESPONSIVENESS
SPECTRUM
EFFICIENT SUPPLY
CHAINS
IMPLIED UNCERTAINTY
CERTAIN
SPECTRUM
DEMAND
UNCERTAIN
DEMAND
CHANGES IN SUPPLY CHAIN
STRATEGY OVER A PRODUCT’S
RESPONSIVE
LIFE CYCLE
SUPPLY
CHAIN
RESPONSIVENESS
SPECTRUM
ic
g
te
a
r
t
S
f
o
e
n
o
Z
t
i
F
EFFICIENT SUPPLY
CHAINS
IMPLIED UNCERTAINTY
CERTAIN
SPECTRUM
DEMAND
UNCERTAIN
DEMAND
COMPARISON OF EFFICIENT AND
RESPONSIVE SUPPLY CHAINS
PRIMARY GOAL
EFFICIENT SUPPLY
CHAIN

Supply demand at
lowest cost
RESPONSIVE SUPPLY
CHAIN

Respond quickly to
demand
COMPARISON OF EFFICIENT AND
RESPONSIVE SUPPLY CHAINS
PRODUCT DESIGN STRATEGY
EFFICIENT SUPPLY
CHAIN

Maximise
performance at
minimum product cost
RESPONSIVE SUPPLY
CHAIN

Create modularity to
allow postponement
of product
differentiation
COMPARISON OF EFFICIENT AND
RESPONSIVE SUPPLY CHAINS
PRICING STRATEGY
EFFICIENT SUPPLY
CHAIN

Lower margins
because price is a
prime customer driver
RESPONSIVE SUPPLY
CHAIN

Higher margins as
price is not a prime
customer driver
COMPARISON OF EFFICIENT AND
RESPONSIVE SUPPLY CHAINS
MANUFACTURING STRATEGY
EFFICIENT SUPPLY
CHAIN

Lower costs through
higher utilisation
RESPONSIVE SUPPLY
CHAIN

Maintain capacity
flexibility to meet
unexpected demand
COMPARISON OF EFFICIENT AND
RESPONSIVE SUPPLY CHAINS
INVENTORY STRATEGY
EFFICIENT SUPPLY
CHAIN

Minimise inventory to
lower cost
RESPONSIVE SUPPLY
CHAIN

Maintain buffer
inventory to meet
unexpected demand
COMPARISON OF EFFICIENT AND
RESPONSIVE SUPPLY CHAINS
LEAD TIME STRATEGY
EFFICIENT SUPPLY
CHAIN

Reduce but not at the
expense of cost
RESPONSIVE SUPPLY
CHAIN

Aggressively reduce
even if the costs are
significant
COMPARISON OF EFFICIENT AND
RESPONSIVE SUPPLY CHAINS
SUPPLIER STRATEGY
EFFICIENT SUPPLY
CHAIN

Select based on cost
and quality
RESPONSIVE SUPPLY
CHAIN

Select based on
speed, flexibility and
quality
COMPARISON OF EFFICIENT AND
RESPONSIVE SUPPLY CHAINS
TRANSPORTATION STRATEGY
EFFICIENT SUPPLY
CHAIN

Greater reliance on
low cost modes
RESPONSIVE SUPPLY
CHAIN

Greater reliance on
responsive modes
EXPANDING STRATEGIC
SCOPE

Intra- company and Intra-operation Scope
– The minimse local cost view
 Intra-company Intra-functional Scope
– The minimise functional cost view

Intra-company Inter-functional Scope
– The maximise company profit view

Inter-company Inter-functional view
– The maximise supply chain surplus view
Supply Chain
The Supply Chain performs two distinct types of
functions:
1) Physical function
- Includes converting raw materials into parts,
components, and eventually finished goods,
transporting all of them from one point in the
supply chain to the next
- Physical costs include costs of production,
transportation etc.
Supply Chain
2) Market mediation
- Purpose is ensuring that the variety of
products reaching the marketplace matches
what consumers want to buy
- Market mediation costs arise when supply
exceeds demand
Supply Chain

There are also 2 types of supply chains
- Physically efficient process
- Supplies predictable demand efficiently at the
lowest possible cost
- Generate high turns and minimise inventory
throughout the chain
- Market responsive process
- Respond quickly to unpredictable demand in
order to minimise stock outs, forced
markdowns, and obsolete inventory
- Deploys significant buffer stocks of parts or
finished goods
Supply Chain Strategy
To devise the ideal supply chain strategy, companies
have to:
- Determine if their products are functional or
innovative
- Decide if company’s supply chain is physically
efficient or responsive to the market
- Employ a matrix to formulate the ideal
supply-chain strategy
Matching Supply Chain Design to
Demand
Functional
Innovative Products
Products (e.g
(e.g. Seasonal or
continuity products) promotional)
Efficient Supply
Chain
Responsive Supply
Chain
Match
Mismatch
Mismatch
Match
Marshall Fisher. HBR Mar-Apr 1997
Supply Chain Strategy
Functional Products
Efficient
Supply Chain
move
match
Innovative Products
mismatch
e.g. Campbell’s Soup
move
mismatch
Responsive
Supply Chain
match
However not very common
withfunctional products
e.g. National Bicycle
Outline

Drivers of supply chain performance
 A framework for structuring drivers
– Inventory
– Transportation
– Facilities
– Information
 Obstacles to achieving fit
Drivers of Supply Chain
Performance

Inventory
– raw materials, WIP, finished goods within a
supply chain
– inventory policies
 Transportation
– moving inventory from point to point in a
supply chain
– combinations of transportation modes and
routes
Drivers of Supply Chain
Performance

Facilities
– places where inventory is stored, assembled,
or fabricated
– production sites and storage sites
 Information
– data and analysis regarding inventory,
transportation, facilities throughout the supply
chain
– potentially the biggest driver of supply chain
performance
A Framework for Structuring
Drivers
Competitive Strategy
Supply Chain Strategy
Efficiency
Responsiveness
Supply chain structure
Inventory
Transportation
Drivers
Facilities
Information
Inventory:
Role in the Supply Chain

Inventory in the supply chain exists because of a
mismatch between supply and demand

Major source of cost and huge influence on
responsiveness

Significant impact on material flow time in a
supply chain

Inventory and flow time are “synonymous” in a
supply chain
Inventory:
Role in Competitive Strategy

If responsiveness is a strategic
competitive priority, a firm can locate
larger amounts of inventory closer to
customers

If cost is more important, inventory can be
reduced to make the firm more efficient
Components of Inventory
Decisions

Cycle inventory
– Average amount of inventory used to satisfy
demand between shipments
– Depends on lot size

Safety inventory
– inventory held in case demand exceeds
expectations
– costs of carrying too much inventory versus cost of
losing sales
Components of Inventory
Decisions

Seasonal inventory
– inventory built up to counter predictable variability
in demand
– cost of carrying additional inventory versus cost of
flexible production

Overall trade-off: Responsiveness versus
efficiency
– more inventory: greater responsiveness but
greater cost
– less inventory: lower cost but lower
responsiveness
Inventory Control Systems

As demand and lead times are variable, we
can either
 order fixed quantities of stock at variable
times or
 order variable quantities at fixed times
Two-bin replenishment system

Imagine two equally sized bins (bays, pallets or
similar) used for storage in the warehouse or at
the workstation storage point. The ROL be thus
be seen visually. With the first bin empty, a new
full bin is "called" to arrive before the second bin
is exhausted. The call is rotated. With proper
rotation system is efficient (little paperwork). In a
computerised enviroment the bins/pallets
themselves can be bar coded and their
movement/position and batch numbers of bin
components can be traced.
Comparing Responsiveness as
demand changes


Re-order level approach
- average stock levels stay more or less the same
and are less responsive to changes in demand.
There is a risk of stock outs with Unexpected
rising demand but outstanding re-supply orders
can be chased.
Re-order cycle systems
- rising demand can exhaust stocks with no
outstanding orders in the pipeline.
Which System?

Of the systems (annual demand, two-bin, re-order
cycle, re-order level) none are universally
versatile. Many organisations operate a hybrid.
Choosing between fixed quantity or fixed time
approaches depends on risking unexpected
movement in demand against the costs of
administering convenient, scheduled
replenishment. The safety stock penalty of fixed
re-order cycle methods worsens as stock usage
value and demand variability rise. Generally fixed
time systems suit stock with stable/predictable
demand patterns and low usage values
Transportation:
Role in the Supply Chain

Moves the product between stages in the
supply chain

Large impact on responsiveness and
efficiency

Faster transportation allows greater
responsiveness but lower efficiency

Also affects inventory and facilities
Transportation:
Role in the Competitive
Strategy

If responsiveness is a strategic competitive
priority, then faster transportation modes can
provide greater responsiveness to customers
who are willing to pay for it

Can also use slower transportation modes for
customers whose priority is price (cost)

Can also consider both inventory and
transportation to find the right balance
Components of
Transportation Decisions



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Mode of transportation:
– air, truck, rail, ship, pipeline, electronic
transportation
– vary in cost, speed, size of shipment, flexibility
Route and network selection
– route: path along which a product is shipped
– network: collection of locations and routes
In-house or outsource
Overall trade-off: Responsiveness versus
efficiency
Facilities

Role in the supply chain
– the “where” of the supply chain

Role in the competitive strategy
– economies of scale from fewer facilities
(efficiency priority)
– larger number of smaller facilities
(responsiveness priority)
Components of Facilities
Decisions

Location
– centralization (efficiency) vs. decentralization
(responsiveness)
– other factors to consider (e.g., proximity to
customers)

Capacity (flexibility versus efficiency)

Overall trade-off: Responsiveness versus
efficiency
Information:
Role in the Supply Chain

The connection between the various
stages in the supply chain -- allows
coordination between stages

Crucial to daily operation of the each
stage in a supply chain -- e.g., production
scheduling, inventory levels
Flows in a Supply Chain
Information
Product
Customer
Funds
Information:
Role in the Competitive Strategy

Allows supply chain to become more
efficient and more responsive at the same
time
– reduces the need for a trade-off

Information technology investments

What information is most valuable?
Components of Information
Decisions

Coordination and information sharing

Enabling technologies
– EDI
– Internet
– ERP systems
– Supply Chain Management software

Overall trade-off: Responsiveness versus
efficiency
Considerations for Supply
Chain Drivers
Driver
Efficiency
Inventory
Cost of holding
Availability
Transportation
Consolidation
Speed
Facilities
Consolidation/
Proximity/
Dedicated
Flexibility
What information is best suited
for each objective
Information
Responsiveness