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 Implied
– Product variety Demand
– Price Uncertainty
– Innovation
– Demand channels
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

Number of channels increases
Rate of innovation increases
Required service level increases
disaggregated
Total customer demand is now
disaggregated over more channels
New products tend to have more
uncertain demand
Firm now has to handle unusual
surges in demand
 Levels of Implied Demand
Uncertainty

Predictable Predictable supply and uncertain Highly uncertain

supply and demand or uncertain supply and supply and demand
demand predictable demand or somewhat
uncertain supply and demand

Salt at a An existing A new

supermarket automobile communication
model device

Figure 2.2: The Implied Uncertainty (Demand and Supply)

Spectrum
 Correlation Between Implied Demand
Uncertainty and Other Attributes

Attribute Low Implied High Implied

Uncertainty Uncertainty
Product margin Low 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 Somewhat Somewhat Highly

efficient efficient responsive responsive

Integrated Hanes Most Seven-Eleven

steel mill Apparel automotive Japan
Advance Make to stock Production Variety of
Production manufacurer Variety of products by
Schedules, with products locaiton and by
Less variety a lead time in delivered in the time of the
and flexibilty weeks weeks 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 Implied Uncertain

demand uncertainty demand
spectrum
 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
Primary goal Lowest cost
Product design strategy Min product cost
Pricing strategy Lower margins
Mfg strategy High utilization
Inventory strategy Minimize inventory
Lead time strategy Reduce but not at expense
of greater cost
Supplier selection strategy Cost and low quality
Transportation strategy Greater reliance on low cost
modes
Responsive
Quick response
Room to allow
postponement
Higher margins
Capacity flexibility
Buffer inventory
Aggressively reduce even if
costs are significant
Speed, flexibility, quality
Greater reliance on
responsive (fast) modes