Supply Chain Management:

Strategic Fit and Scope

(Source: Supply Chain Management, Strategy,
Planning and Operation, By Sunil Chopra,
Peter Meindl, D. V. KalraPearson)
For academic purpose and private circulation
only

Competitive strategy
Competitive

strategy defines, relative to its

competitors, the set of customer needs a firm
seeks to satisfy through its products and services.

Competitive strategy is defined based on how the

customer prioritizes product cost, delivery time,

variety and quality.
WalMart & McMaster Carr
WalMart: Low price , product availability
McMaster Carr : Convenience, availability and responsiveness
Blue Nile (online diamond retailing model), Zales (Diamond retail
stores)
Blue Nile low cost, variety
Zales responsiveness, help in product selection
4-2

Competitive strategy
Competitive strategy of a firm will be defined

by customers priorities.
Competitive strategy targets one or more

customer segments and aims to provide

products and services that satisfy customer
needs.

4-3

Competitive strategy
To execute a companys competitive strategy,

various functions in a firm play a role and each

develops its own strategy.
E.g.
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 will be
positioned, priced, and promoted.
4-5

Competitive strategy
Supply chain strategy is the find the correct
balance

between

responsiveness

and

efficiency that fits the competitive strategy.

It determines the nature of:
Inventory level
material procurement,
transportation of materials to and from the company,
manufacture of product
distribution of product to customer alongwith follow up service,
specification whether these processes will be performed
inhouse or outsources.
4-6

Competitive strategy
All functional strategies as well as supply chain

strategy must support

competitive strategy.

one

another

and

the

E.g. Seven Eleven Japan success can be attributed to

excellent fit among functional strategies including supply

chain strategy.
Marketing strategy- convenience, product availability, variety.
Product development strategy: exploits frequent customer
visits to stores, make use of existing infrastructure
Operations and distribution strategy: focuses on high density
of stores, very responsive, excellent information networks
4-7

Achieving Strategic Fit

Strategic fit

It requires that both competitive and supply chain

strategies have aligned goals.

It

refers

to

the

consistency

between

the

customer priorities that the competitive strategy

hopes to satisfy and the supply chain capabilities
that the supply chain strategy aims to build.

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 e.g. conflict
between marketing and distribution.

Achieving Strategic Fit

Dell and its Supply Chain
1993-2006:
Competitive strategy was to provide large variety of
customised products at reasonable price.
With focus on customisation, Dells supply chain focus was
designed to be very responsive.
Assembly facilities were designed to be flexible rather than
focussing on low cost and producing large volumes.
Dell PCs were designed to use common components and
allow rapid assembly.
Dell was able to produce customised products with low
inventory.
Because of low inventory, suppliers and carriers were highly
responsive.
4-9

Achieving Strategic Fit

2007 onwards:
Changed its competitive strategy and supply chain
While it continued to offer customisation, it also

started selling PCs through retail stores like Wal-Mart.

In retail sales, focus is on low cost as against
customisation in Direct Sales Channel
Changes were made in earlier flexible and responsive
supply chain that satisfied customisation
Dell increased contract manufacturing in low cost
countries. Also increased inventory levels.

4-10

Steps in Achieving Strategic Fit

To achieve strategic fit, a company must ensure that

its supply chain capabilities support its ability to
satisfy the needs of targeted customer segments.

Three basic steps in achieving strategic fit are:

1. Understanding the customer and supply chain

uncertainty
2. Understanding the supply chain
3. Achieving strategic fit

Understanding the customer and supply chain

uncertainty
To understand the customer, a company must

identify the needs of the customer segment being

served.
Company must also understand uncertainity these

needs impose on the supply chain.

4-12

Understanding the customer and supply chain

uncertainty
E.g.
Seven Eleven- Customer need of convenience
Wall-Mart- Customer need of low cost, tolerate

less variety
Each customer in a particular segment will tend to

have similar needs, whereas customer in different

segments can have different needs.

4-13

Step 1: Understanding the Customer and

Supply Chain Uncertainty
Customer Demand from different segments
varies along several attributes:
Quantity of product needed in each lot
Response time customers will tolerate
Variety of products needed
Service level required (e.g. high
availability)
Price of the product
Desired rate of innovation in the product

product

Step 1: Understanding the Customer and

Supply Chain Uncertainty

One key measure which combines different attributes

of the demand is Implied demand uncertainty

Demand uncertainty: It is uncertainty of customer

demand for a product.

Implied demand uncertainty:

It is the resulting uncertainty for

only the portion of

the demand that the supply chain plans to satisfy and

handle based on the attributes the customer desires.

It is the demand uncertainty imposed on the supply

chain because of the customer needs it seeks to satisfy.

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

more disaggregate

Number of channels through

which product may be acquired
increases

Increase because the total customer demand is now

disaggregated over more channels

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 (but the underlying
demand uncertainty may not change) Table 2-1

Implied Uncertainty and Other characteristics of

demand
Low Implied High
Uncertainty Implied
Demand
Uncertainty
Product margin

Low

High

Average forecast error

10%

40% to 100%

Average stockout rate

1% to 2%

10% to 40%

Average forced season-end

markdown

0%

10% to 25%

1. Products with uncertain demand are less mature,

have less competition and hence high margins.
2. Forecast are more accurate when demand
uncertainty is less.
Table 2-2
3. Increased demand uncertainty leads to increased
difficulty in matching demand & supply, leading to
stockout or oversupply.
4. Markdowns are high in case of high demand
uncertainty as oversupply often results

Implied Demand Uncertainty

Along with implied demand uncertainty it is

necessary to consider supply uncertainty.

Supply uncertainty is related to capability

of supply chain.
E.g when new product and manufacturing

process is introduced, breakdowns

frequent and supply uncertainty is high

are

4-18

Impact of Supply Source Capability

Supply Source Capability

Causes Supply Uncertainty

to...

Frequent breakdowns

Increase

Unpredictable and low yields

Increase

Poor quality

Increase

Limited supply capacity

Increase

Inflexible supply capacity

Increase

Evolving production process

Increase

Table 2-3

Step 1: Understanding the Customer

and Supply Chain Uncertainty
Thus

uncertainty from customer (implied

demand uncertainty) and supply chain (supply
uncertainty) can be combined on an implied
uncertainty spectrum.

This is the uncertainty which a company

faces in achieving a strategic fit between

competitive strategy and supply chain
strategy.
4-20

Step 2: Understanding Supply Chain

Capabilities

Creating a strategic fit requires creating a supply chain strategy

that best meets the demand a company has targeted given the
uncertainty.

This requires understanding and building capabilities /

characteristics in the supply chain

Supply chain responsiveness : It 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 very high service level

Contd

Step 2: Understanding Supply Chain

Capabilities

Responsiveness comes at a cost e,g, to wide ranges

of quantities demanded shall require high capacity.

Supply chain efficiency is the inverse to the cost of

making and delivering the product to the customer.

Increases in cost lowers the efficiency.

For every strategic choice to increase responsiveness,

there are additional costs that lower efficiency.

Step 2: Understanding Supply Chain

Capabilities
The cost-responsiveness efficient frontier curve shows the

lowest possible cost for a given level of responsiveness.

It represents the cost-responsiveness performance for the

best supply chains.

It

shows trade-off between responsiveness and

costs.

Supply chains range from those that focus solely on being

responsive to those
supplying at low cost.

that

focus

on

producing

and

Thus a key strategic decision for a company is to

map it on responsiveness spectrum i.e. choose the

level of responsiveness it seeks to provide.
4-25

Step 3: Achieving Strategic Fit

Ensure

that

responsiveness

the

degree

is

consistent

of
with

supply
the

chain
implied

uncertainty.

Goal is to target high responsiveness for a

supply

chain

facing

high

implied

demand

uncertainty and efficiency for a supply chain

facing low implied demand uncertainty.

Increased

implied

demand

uncertainty

from

customers and supply chain is best served by

increasing responsiveness.

Companies should move their competitive strategy

(and resulting implied uncertainty) and supply chain
strategy (and resulting responsiveness) towards
zone of strategic fit

Step 3: Achieving Strategic Fit

E.g. Mac-Master Carr: (sells about 500000 products

through catalog, website)

Targets customers of MRO products
Ships to customer all its orders
Customers value high variety
Delivery in less than 24 hours
Thus there is high implied demand uncertainty
on account of customer needs.
Mac-Master carries high level of inventory, have high

level of picking and packing capacity at their

warehouses for a responsive supply chain even at a
higher cost.
4-29

Step 3: Achieving Strategic Fit

For achieving strategic fit, 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.
4-30

Step 3: Achieving Strategic Fit

IKEA : a Swedish furniture retailer, Stores in 20 countries
Competitive strategy: Target customers who want stylish
furniture with reasonable variety at low prices.
Supply Chain Strategy:
Limits variety of furniture style through modular design,
products easy to assemble. Modular design of products allow
moving final assemble to customer.
Have large stores with large inventory, stocks all styles in
stores and serves customer through stock.
Manufacturers produces large volumes of few modules and
focus on efficiency.
Transportation

focuses

on

shipping

large

quantities

of

unassembled modules at low cost o large stores.

4-31

Step 3: Achieving Strategic Fit

Large

stores
allow
replenishment
orders
to
its
manufacturers to be more stable and predictable. Hence
large stores inventory and modular design decreases the
implied demand uncertainty faced by supply chain.

Stores inventory absorb most of the implied uncertainty and

passes little uncertainty to manufacturers.

Manufacturers are located in low-cost countries and focus

on efficiency.
Thus IKEA provides responsiveness in supply chain with the

stores absorbing most of the uncertainty and being

responsive.
Manufacturers and suppliers absorb little uncertainty and are
efficient.
4-32

Step 3: Achieving Strategic Fit

England Inc : a furniture manufacturer
Manufactures sofas, chairs etc to order and deliver them
furniture stores across the country within 3 weeks.
Large variety and promise of quick delivery imposes high
implied demand uncertainty on supply chain.
Retailers do not carry much inventory and hence pass on
implied uncertainty to manufacturer.
Thus retailer can be efficient because of less implied
uncertainty faced by them.
Manufacturers have flexible manufacturing process to
absorb implied demand uncertainty and be responsive.
Manufacturer hold more raw material inventory and supplier
focus on efficiency.
If manufacturer decreases its raw material inventory, then
supplier must become more responsive.
4-33

Supply chain can achieve a given level of

responsiveness and efficiency by adjusting roles of
each stage. Making one stage more responsive
allow other stage to become more efficient.

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

A Framework for Structuring Drivers

Tailoring the Supply Chain

When supplying multiple customer segments with a wide

variety of products through several channels, a firm must tailor
its supply chain to achieve strategic fit.

E.g. Dell: Built responsive supply chain for customised PCs.

For low cost channel (e.g for Wall Mart) designed a low cost
supply chain.

Requires sharing some links in the supply chain with some

products, while having separate operations for other links. (e.g.
Various products may be manufactured at the same
plant but those products requiring responsiveness may
be

shipped

courier.

by

faster

mode

of

transportation

like

Changes Over Product Life Cycle

Beginning stages:

Demand is very uncertain, and supply may be

unpredictable.

Margins are often high, and time is crucial to gaining

sales.

Product availability is crucial to capturing the market.

Cost is often a secondary consideration.

In

this

case

responsiveness

is

the

important characteristic of supply chain.

most

Changes Over Product Life Cycle

Later stages:

Demand has become more certain, and supply is

predictable.

Margins are lower as a result of an increase in

competitive pressure.

Price becomes a significant factor in customer

choice.

In this case efficiency is the most important

characteristic of supply chain.

Expanding Strategic Scope

Scope of strategic fit the functions within

the firm and stages across the supply chain
that devise an integrated strategy with an
aligned objective.

It refers to the supply chain stages across

which strategic fit applies.

Expanding Strategic Scope

Intraoperation scope minimize local cost view

Each stage of the supply chain devises strategy independently

Intrafunctional scope minimize total functional cost

Firms align all operations within a function

Interfunctional scope maximize company profit

Functional strategies are developed to align with one another and the
competitive strategy

Contd

Expanding Strategic Scope

Intercompany

scope

maximize

supply

chain

surplus

Supplier and customer work together and share

information to reduce total cost and grow supply
chain surplus.

Competitive playing field has shifted from company

versus company to supply chain versus supply chain

Agile intercompany scope a firms ability to achieve

strategic fit when partnering with supply chain stages
that change over time.

Different Scopes of Strategic Fit Across a

Supply Chain

Figure 2-7

Challenges to Achieving and Maintaining

Strategic Fit

Increasing product variety and shrinking life cycles

Greater product variety and shorter life cycles increase

uncertainty while reducing the window of opportunity
within which the supply chain can achieve fit.

Globalization and increasing uncertainty

Significant fluctuations in exchange rates, global demand,

and the price of crude oil.
Contd

Challenges to Achieving and Maintaining

Strategic Fit
Fragmentation of supply chain ownership

Firms are less vertically integrated

Take advantage of supplier and customer competencies

they did not have

New ownership structure makes aligning and managing

the supply chain more difficult

Aligning all members of a supply chain has become

critical to achieving supply chain fit

Contd

Challenges to Achieving and Maintaining

Strategic Fit

Changing technology and business environment

Customer needs and technology change may force a firm

to rethink their supply chain strategy

The environment and sustainability

Issues of environment and sustainability are growing in

relevance and must be accounted for when designing
supply chain strategy

Opportunities may require coordination across different

members of the supply chain