SC Performance and achieving strategic fit

• Company’s Competitive strategy and its supply chain strategy affects the performance based on its strategic fit.

• Company’s competitive strategy defines, relative to its competitor the set of customer needs that it seeks to satisfy through its products and services.

e.g.: wall mart strategy is to make available variety of products and at low cost.

Whereas McMaster sells MRO (aintanence,repiar,operations) products. It offers about 4 lakh items through catalogue/website. Its strategy is built around customer convenience ,availability and responsiveness. (not on cost) . These are the contradictory views.

• Similarly Dell has build to order strategy through web as against Gateway selling through retailers. Customer walking into Gateway can walk away with e-machine but variety and customization is limited where as from Dell you can get the machine of your choice in a weeks time. Both scatters to different kind of needs of customers.

• Thus a firms competitive strategy is defined based on customers priorities.

• Competitive strategy targets one or more customer segments and aims to provide products and services that satisfy these customers needs.

Value chainFinance , Accounting , Information technology,

Human Resource

New product development> Marketing & sales> operations

Distribution > service

• New product development = creates specifications for the product

• Marketing & Sales : Generate demand & bring input back to new product development.

• Operations – transforms inputs into outputs to create the product

• Distribution = either takes the product to customer or brings the customer towards product.

• Service – customer requests after the sale or during the sale

• Other support functions facilitate core functions.

• Now to execute Cos competitive strategy , all these functions play a role and each must develop its own strategy.

• Product development strategy :specifies the portfolio of new products the company will develop.

• Marketing & sales – specifies how market will be segmented , how the product will be positioned , priced and promoted.

• Supply chain strategy – determines the nature of procurement of raw materials , transportation of materials to & fro the company , manufacture of the product or operation to provide the service and distribution of the product to the customer along with any follow up service and a specification whether these processes will be performed or outsourced.

• The value chain emphasizes the close relationship between functional strategies within a company. Each function is crucial and functional strategies can not be formulated in isolation. They are closely intertwined and must fit and support each other if a company is to succeed.

Fitment of SC strategy and Competitive strategy

• Strategic fit means both SC strategies and Competitive strategies have aligned goals – consistency between customer priorities that competitive strategy hopes to satisfy and SC capabilities that SC strategy aims to build.

• Achieving strategic fit is the main consideration when SC strategy /design is formulated

• All processes and functions that are part of Cos value chain contribute to success or failure – they do not operate in isolation – no one function or process can ensure chains success. Failure at any one process or function can lead to failure of over all value chain. Thus Cos success / failure is closely linked to the following keys;

1) Competitive strategy and all functional strategies must fit together to form a coordinated overall strategy. Each functional strategy must support other functional strategies and help a firm reach its competitive strategy goal

2) The different functions in a Co must appropriately structure their processes and resources to be able to execute these strategies successfully.

3) Design and overall SC and role of each stage must be aligned to support the SC Strategy.

• A company can fail because of lack of strategic fit or because of its design , processes and resources do not provide the capabilities to support the desired strategic fit.

• If this alignment is not achieved conflicts arise between functional goals within firm or between goals of different SC stages.

• E.g.; marketing publicizes variety of products in quick time whereas distribution targeting grouping of product to get economies there by delaying.

Ways to achieve strategic fit

• A competitive strategy specifies one or customer segments it hopes to satisfy.

• To get strategic fit Co should ensure its SC capabilities support its ability satisfy the targeted customer segments.

Step 1: Understanding The customer and SC uncertainty

Understand the needs of customer segment being served.

A customer may look for low cost while other may seek convenience . In general following attributes are demanded by customers;

1. The quantity of the product needed in each lot.

2. Response time that customer are willing to tolerate.

• There are three steps;1) Understanding the customer and SC uncertainty2) Understanding SC Capabilities3) Achieving strategic fit.If there is a mismatch exists between what SC is

capable of and what Customer needs are , then either SC need to be restructured to suit competitive strategy or alter competitive strategy.

SC Responsiveness means

1.Respond to wide ranges of quantities demanded.2. Meet short lead times3. Handle Variety of products needed4. Meet high Service level required 5. Price of product during emergencies6. Desired rate of innovation in the product.

Each customer in a particular segment will tend to have similar needs.

Identifying a single measure

• Although we noticed a number of attributes along which customer demand varies , we need to identify one key measure for combining all of these attributes.

• Once this single measure is identified SC can be defined well

• It may appear that each of the customer need categories should be viewed differently but in a very fundamental sense , each customer need can be translated into the metric of Implied demand uncertainty.

• IMPLIED DEMAND UNCERTAINTY is demand uncertainty due to the portion of demand that the SC is targeting , not the entire demand.

• We make a distinction between demand uncertainty and implied demand uncertainty .

• DEMAND UNCERTAINTY reflects the uncertainty of customer demand for a product. IMPLIED DEMAND Uncertainty on the other hand is the resulting uncertainty for only the portion of the demand that SC plans to satisfy and attributes the customer desires.

e.g.; (1) a firm supplying only emergency orders for a product will face a higher implied demand uncertainty than a firm that supplies the same product with a long lead time as the second firm has an opportunity to fulfill the orders evenly over the long lead time.

(2) Another example is on impact of service level. As a supply chain raises its level of service , it must be able to meet higher and higher percentage of actual demand forcing it to prepare for rare surges in demand

• Thus raising service level increases the implied demand uncertainty even though the product’s demand uncertainty does not change.

• Both the product demand uncertainty and various customer needs that the SC tries to fill affect implied demand uncertainty.

Impact of customer needs on 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 deceases 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 a 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.

• Since each individual customer need contributes to the implied demand uncertainty , we can use IMPLIED DEMAND UNCERTAINTY as a common metric with which to distinguish different types of demand.

• Fisher pointed out that implied demand uncertainty is often correlated with other characteristics of demand.

Correlation between implied demand uncertainty and other attributes

Other attributes Low implied demand uncertainty

High implied uncertainty

Product margin Low High

Average forecast error 10% 40% to 100%

Average stock out rate 1% to 2 % 10% to 40%

Average forced season-end markdown

0% 10% to 25%

1. Products with uncertain demand are often less mature and have less direct competition as a result , margins tend to be high.

2. Forecasting is more accurate when demand has less uncertainty.

3. Increased implied demand uncertainty leads to increased difficulty in matching supply

4. Markdowns are high for products with high implied demand uncertainty because oversupply often results.

e.g. ; if we take salt and palmtop computer Salt has low implied demand uncertainty – low

margins- low stock out rates – accurate demand forecast possible- virtually no markdowns-

Palm top computer: high implied uncertainty- high margins- high stock out costs (if successful) – large markdowns (if it is failure).

e.g. : circuit board supplier to TWO different types of PC manufacturer. One PC manufacturer like DELL who is build to order whose lead time is same day. In this case the supplier has to have flexible manufacturing or ability to build high inventory to meet DELL deadlines. Forecast and supplier inventories would be high and margins also may be high.

• The other customer builds a small variety of PCs and give the supplier long lead time and reducing forecast errors and inventories. Thus his margins may be low.

from the above two examples we can see the same product but to different customer segment can have different implied demand uncertainty given separate service requirements.

Uncertainty resulting from capability of supply chain

• When a new component is introduced in a PC industry the quality yields of the production process tends to be low and breakdowns are frequent. Delivery becomes difficult and PC manufacturers suffer. But once the production technology becomes mature and yields improve Cos are able to follow a fixed delivery schedule resulting in low supply uncertainty.

Impact of supply source capability on supply uncertainty

Supply source capability Cause supply uncertainty to

Frequent break downs increase

Unpredictable and low yields Increase

Poor quality Increase

Limited supply capacity Increase

Inflexible supply capacity Increase

Evolving production process increase

• Supply uncertainty is also strongly affected by the life cycle position of the product. New products being introduced have higher supply uncertainty because designs and production processes are still evolving . In contrast mature products have less supply uncertainty.

• Using this a spectrum can be created by combining the demand uncertainty and supply uncertainty.

Implied uncertainty (demand & supply ) spectrum.

• Predictable ‘predictable supply Highly uncertain supply & demand & uncertain demand supply & demand or uncertain supply & predictable demand or somewhat uncertain supply & demand--------------------------------------|---------------------------------------Salt at an existing a new Super market automobile model communication device

Step 2. Understanding SC Capabilities

• Like we placed demand on a one dimensional spectrum (the implied demand uncertainty) , the supply also needs to be placed on a spectrum

• SCs have many different characteristics that influence their responsiveness and efficiency.

• SCs can do the following;

• Respond to wide ranges of quantities demanded

• Meet short lead times• Handle a large variety of products• Build highly innovative products• Meet a high service level• Handle supply uncertainty

• The more these abilities the more responsive SC is.

• Responsiveness comes at a cost• SC efficiency is the inverse of cost of making

and delivering a product to a customer• Increases in cost lower efficiency.

Cost responsiveness efficient frontier

• SC range from those that focus solely on responsive to those that focus on low cost.

• Dell SC is highly responsive as it focuses on it.• Sam’s club is low cost and hence efficient

(eliminates responsiveness)

Step 3: Achieving strategic fit

• The final step is • Having understood implied uncertainty and SC

position on responsiveness spectrum the next step is to ensure that the degree of SC responsiveness is consistent with the implied uncertainty.

• The goal is to target high responsiveness for a SC facing high implied uncertainty and efficiency for a SC facing low implied uncertainty.

e.g. Dell: high response – hence high demand uncertainty.

It has two options (1) to go for efficient SC OR2) To go for responsive SCIf it opts for efficient cost will come down but

delivery will be delayed – not acceptable to DellHence Dell has to opt for highly responsive SC

only.

• E.g. : Barilla – pasta manufacturer: it has stable customer demand – low implied demand uncertainty-supply is quite predictable-

• Barilla if it opts for highly responsive SC it will increase the cost and will loose customers.

• Hence it has to opt for efficient SC which will lower cost .

• This relations ship is represented by zone of strategic fit.

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Achieving Strategic Fit Shown on the Uncertainty/Responsiveness Map (Fig. 2.5)

Implied uncertainty spectrum

Responsive supply chain

Efficient supply chain

Certain demand

Uncertain demand

Responsiveness spectrum Zone of

Strategic Fit

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Comparison of Efficient and Responsive Supply Chains (Table 2.4)

Efficient Responsive

Primary goal Lowest cost Quick response

Product design strategy Min product cost Modularity to allow postponement

Pricing strategy Lower margins Higher margins

Mfg strategy High utilization Capacity flexibility

Inventory strategy Minimize inventory Buffer inventory

Lead time strategy Reduce but not at expense of greater cost

Aggressively reduce even if costs are significant

Supplier selection strategy Cost and low quality Speed, flexibility, quality

Transportation strategy Greater reliance on low cost modes

Greater reliance on responsive (fast) modes

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Other Issues Affecting Strategic Fit

• Multiple products and customer segments• Product life cycle• Competitive changes over time

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Multiple Products and Customer Segments

• Firms sell different products to different customer segments (with different implied demand uncertainty)

• The supply chain has to be able to balance efficiency and responsiveness given its portfolio of products and customer segments

• Two approaches:– Different supply chains– Tailor supply chain to best meet the needs of each

product’s demand

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Product Life Cycle

• The demand characteristics of a product and the needs of a customer segment change as a product goes through its life cycle

• Supply chain strategy must evolve throughout the life cycle

• Early: uncertain demand, high margins (time is important), product availability is most important, cost is secondary

• Late: predictable demand, lower margins, price is important

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Product Life Cycle

• Examples: pharmaceutical firms, Intel• As the product goes through the life cycle, the

supply chain changes from one emphasizing responsiveness to one emphasizing efficiency

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Competitive Changes Over Time

• Competitive pressures can change over time• More competitors may result in an increased

emphasis on variety at a reasonable price• The Internet makes it easier to offer a wide

variety of products• The supply chain must change to meet these

changing competitive conditions

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Expanding Strategic Scope• Scope of strategic fit

– The functions and stages within a supply chain that devise an integrated strategy with a shared objective

– One extreme: each function at each stage develops its own strategy

– Other extreme: all functions in all stages devise a strategy jointly• Five categories:

1.Intra-company intra-operation scope2.Intra-company intra-functional scope3.Intra-company inter-functional scope4.Inter-company inter-functional scope5.Agile inter-company- inter-functional scope

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Different Scopes of Strategic Fit Across a Supply Chain

Suppliers Manufacturer Distributor Retailer Customer

Competitive Strategy

Product Development

Strategy

Supply Chain Strategy

Marketing Strategy

IntracompanyIntraoperationat Distributor

IntracompanyIntrafunctionalat Distributor

IntracompanyInterfunctional

at Distributor

IntercompanyInterfunctional

1.Intra-company intra-operation scope

• It is about • One operation within a functional area within

a company.• Here , each operation within each stage of

supply chain devises strategy independently. The resulting collection of strategies will not result in maximizing SC profitability, because different functions and operations have conflicting local objectives.

• E.g.: a distribution company – a transportation operation – evaluation based on shipping cost per unit.

• Shipping the product individually costs $5 per item whereas shipping by truck load costs only $1 per item.

• To minimize cost transportation group, ships by truck load basis as it is economical.

• This decision while minimizing the transportation cost per unit increases the response time and may underline a competitive strategy based on responsiveness.

• The key point is that transportation decision was made independent of other functions within the firm and the rest of supply chain.

• Therefore the strategic fit is restricted only to a portion (transportation)of the distribution stage within the supply chain (smallest eclipse)

2.Intra-company intra-functional scope

• We have just seen that many operations together form each function within a firm – weakness of intra-company intra-operations.

• SC operations include manufacturing , warehousing and transportation among others.

• With the intra company intra-functional scope, the strategic fit is expanded to include all operations within a function.

• In this case warehouse manager no longer minimizes warehousing costs while transport manager independently minimizes transportation costs. By working together and developing a joint strategy, the two minimize the total functional cost.

• Managers now not only look at transportation cost but also look at warehousing and other SC related cost. Although truckload transportation saves the company $4 per item , it costs company additional $8 per item because of increased inventory and warehousing costs. Therefore it costs less for the company to ship each item individually because the extra $4 transportation charge saves the company $8 which otherwise we have to spend for inventory/warehouse related cost.

• Strategic fit now expands to entire function within a stage of supply chain (see distributor) in chart.

3.Intra-company inter-functional scope

• But different functions may have conflicting views which is not solved in the earlier example.

• E.g.: marketing and sales working on revenue generation while manufacturing & distribution focusing on cost reduction.

• Conflicting objectives.! Overall firms performance is hurt .

• Now we have to expand the scope of strategic fit across all functions within the firm.

• For this, all functional strategies are developed to support each other and also the competitive strategy.

• To realize this, the company will now not only look at SC cost but also look at revenues as well.

• Although the company had already decided to ship individual units to bring down inventory costs, marketing wanted to increase inventory so that the company could take advantage of increased sales as a result of higher service levels. If revenues and margins gained from holding more inventory outweigh the additional costs , the company should go ahead and increase inventory.

• Key point : both operational and marketing decisions have revenue and cost impact. They must be coordinated.(see chart distributer.

4.Inter-company inter-functional scope

• The earlier option still does not solve two issues.1. It leads to each stage of SC trying to maximize its

own profits, which does not necessarily result in maximization of SC surplus.

The SC surplus is maximized only when all SC stages coordinate strategy together.

This occurs with “inter company inter functional scope “ in which all stages of SC coordinate strategy across all functions, ensuring that together they best meet the customer’s needs and maximize supply chain surplus.

2. When speed became a great driver of SC success .

Today more and more companies are succeeding not because they have the lowest priced product, and not because they have the highest quality or best performing product, but because they are able to respond quickly to market needs and get the right product to the right customer at the right time.(Zara).

• But responding speedily lies to a large extent outside companies own boundaries for most of the companies.

• Most delays are created at the interface between the boundaries of different stages of SC. Thus managing these interfaces become the key focus to provide quick response. ”the inter company scope ”forces every stage of SC to look across the SC to raise SC surplus and increase the size of the pie that all stages have to share among themselves.(see chart )

• Key point: strategic fit is essential because competitive playing field has shifted from Company Vs Company to Supply Chain Vs Supply Chain. A company’s partner in SC may well determine company’s success as company is intimately tied to supply chain.

• Discuss about treating stages in supply chain that does not belong to company.

• Company’s reducing the inventory but asking supplier to hold it – does not solve the problem.

• Only the ownership changes but costs lie within the supply chain!

5.Agile intercompany inter functional scope

• Strategy and operations at firms must be agile enough to maintain strategic fit in a changing environment.

• Agile scope refers to firms ability to achieve strategic fit when partnering with SC stages that change over time. Some times firm may become part of new SC but still should ensure strategic fit. The level agility is crucial.

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Summary of Learning Objectives

• Why is achieving strategic fit critical to a company’s overall success?

• How does a company achieve strategic fit between its supply chain strategy and its competitive strategy?

• What is the importance of expanding the scope of strategic fit across the supply chain?