Corporate Strategy and its Connection to

Supply Chain Management

Fit Between Corporate and Functional Strategies (Chopra & Meindl)

Corporate Competitive Strategy

Supply Chainor Operations

Strategy

ProductDevelopment

Strategy

Marketingand SalesStrategy

Information Technology Strategy

Finance Strategy

Human Resources 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

Differentiation (Quality; Uniqueness; e.g., Luxury cars, Fashion Industry, Brand Name Drugs)

Cost Leadership (Price; e.g., Wal-Mart, Southwest Airlines, Generic Drugs)

Responsiveness (Reliability; Quickness; Flexibility; e.g., Dell, Overnight Delivery Services)

Competitive Advantage through whichthe company market share is attracted

Defining the Corporate Strategy

• Corporate Strategy: The organization’s positioning in terms of – responsiveness, – cost leadership and – product differentiationrequirements, 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 Growth Maturity Decline

Time

Sales

• Best period to increase market share

•R&D engineering critical

• Frequent product and process changes•Short production runs•High production costs•Limited models•Attention to quality

•Practical to change price or quality image•Strengthen niche

•Forecasting critical•Products and process reliability•Increase capacity•Shift towards product focus•Enhance distribution

•Poor time to change image, price or quality•Competitive costs become critical•Defend market position

•Standardization - minor product changes•Optimum capacity•Process stability•Long production runs

•Cost control critical

•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)

Implied UncertaintySpectrum

CertainDemand

UncertainDemand

EfficientSupply Chain

ResponsivenessSpectrum

ResponsiveSupply Chain

Zone of

Strateg

ic Fit

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

Differentiation

Cost Leadership

Responsiveness

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

Vir

tual

Inte

gra

tio

n

Customer

Dell

Suppliers

Dell Supply Chain

PUSH

PULL

PC SUPPLY CHAINS

Typical PC Supply Chain(Compaq, HP, IBM, etc.)

Customer

DistributionChannels

Manufacturer

Suppliers

PUSH

PULL

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 Responsiveness

Facilities Inventory Transportation Information MarketSegmentation

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 Distribution Consumption Retrieval

Disassembly/Reprocessing

Disposal Reverse Logistics and Re-manufacturing network