strategic fit 02

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© 2007 Pearson Education 2-1

Chapter 2

Supply Chain Performance:Achieving Strategic Fit and Scope




Outline

Why achieving strategic fit is critical to a company’s overall success?How a company achieves strategic fit between its

supply chain strategy and its competitive strategy?Importance of expanding the scope of strategic fitacross the supply chain

The major obstacles that must be overcome to managea supply chain successfully




What is Supply Chain Management?

Managing supply chain flows and assets, to maximize supply chain surplus

What is supply chain surplus ?




Competitive and SupplyChain Strategies

Competitive Strategy: defines the set of customer needs afirm seeks to satisfy through its products and services

For ex: Wal-Mart: provides high variety with reasonablequality at low prices

Blue Nile: online retailing model for diamonds: variety, more

delivery timeand Zales: selling diamond jewelry through retail outlets: lessvariety and less delivery time



© 2007 Pearson Education

Competitive strategy: how the customer prioritizes product cost, delivery time

Different companies have different set of customers

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Product Development Strategy: specifies the portfolio of new products that the company will try to developMarketing and Sales Strategy: specifies how the market will

be segmented and product positioned, priced, and promotedSupply Chain Strategy: – determines the nature of material procurement, transportation of

materials, manufacture of product or creation of service, distribution of product

– Consistency and support between supply chain strategy, competitivestrategy, and other functional strategies is important (cannot work inisolation)

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New Product

Development

Marketing and

Sales Operations Distribution Service

Finance, Accounting, Information Technology, Human Resources

The Value Chain: Linking SupplyChain and Business Strategy


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Supply chain strategy

Dell’s decision to sell direct PC’s to its customers

Amazon’s decisions to build warehouses to stock some essential products

Toyota’s decision to have production facilities in each

of its major markets

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Given its competitive strategy, what should a company’s

supply chain try to do particularly well?

For any company to be successful, its supply chain

strategy and competitive strategy must fit together



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 have the same

goals

A company may fail because of a lack of strategic fit

or because its processes and resources do not providethe capabilities to execute the desired strategyExample of strategic fit -- Dell



Between1993 and 2006:

Dell’s competitive strategy was to provide a largevariety of customizable products at reasonable price

Supply chain was very responsive

Assembly facilities owned by Dell were designed tohandle flexibility in variety

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Low cost and large volumes: problem in strategic fit

Designed to use common components and allowrapid assembly

2007: altered its competitive strategy and supply chain

With continuation to offer customization, it sells PC’sthrough retail stores like Wal-Mart

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Maintained inventory at Wal-Mart

Customers competitive strategies are changing fromcustomized products (flexible and responsive) to lowcost

How to maintain strategic fit?

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How is Strategic Fit Achieved?

Step 1: Understanding the customer and supply chainuncertainty

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 beingserved

Attributes of customer demand:

Quantity of product needed in each lotResponse time customers will tolerateVariety of products needed

Service level requiredPrice of the productDesired rate of innovation in the product





Demand uncertainty: uncertainty of customer demand for a product

Implied demand uncertainty: resulting uncertaintyfor the supply chain given the portion of the demand

the supply chain must handle to satisfy the customer desires





First step to strategic fit is to understand customers bymapping their demand on the implied uncertaintyspectrum




Achieving Strategic Fit

Understanding the Customer – Lot size – Response time

– Service level – Product variety – Price – Innovation

Implied Demand Uncertainty




Impact of Customer Needs on ImpliedDemand Uncertainty

Customer Need Causes implied demanduncertainty to increase because …

Range of quantity increases Wider range of quantity impliesgreater variance in demand

Lead time decreases Less time to react to orders

Variety of products required increases Demand per product becomes moredisaggregated

Number of channels increases Total customer demand is now

disaggregated over more channelsRate of innovation increases New products tend to have more

uncertain demand

Required service level increases Firm now has to handle unusualsurges in demand




Supply uncertainty are affected by life-cycle of a product




Levels of Implied DemandUncertainty

Predictablesupply and

demand

Salt at asupermarket

A newcommunication

device

Highly uncertainsupply and demand

Figure 2.2: The Implied Uncertainty (Demand and Supply)

Predictable supply and uncertaindemand or uncertain supply and

predictable demand or somewhatuncertain supply and demand

An existingautomobile

model




Step 2: Understanding theSupply Chain

How does the firm best meet demand?Dimension describing the supply chain is supplychain responsiveness and efficiency

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 – meet a very high service level




Step 2: Understanding theSupply Chain

There is a cost to achieving responsivenessSupply chain efficiency: inverse of cost of makingand delivering the product to the customer

Increasing responsiveness results in higher costs thatlower efficiency

Second step to achieving strategic fit is to map thesupply chain on the responsiveness spectrum

ex: 7-Eleven Japan: responsive supply chain




Cost-Responsiveness Efficient Frontier

High Low

L ow

High

Responsiveness

Cost




Step 3: Achieving Strategic Fit

Step is to ensure that what the supply chain does wellis consistent with target customer’s needs

Examples: Dell: highly responsiveBarilla (pasta manufacturer): Highly efficient




Responsiveness Spectrum

I ntegrated steel mill

Dell

Highly efficient

Highly responsive

Somewhat efficient

Somewhat responsive

Hanes apparel

M ost automotive production




Step 3: Achieving Strategic Fit

All functions in the value chain must support thecompetitive strategy to achieve strategic fitTwo extremes: Efficient supply chains (Barilla) and

responsive supply chains (Dell)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 andResponsive Supply Chains

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 expenseof 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 costmodes

Greater reliance onresponsive (fast) modes




Other Issues Affecting Strategic Fit

Multiple products and customer segments

Product life cycle

Competitive changes over time




Multiple Products andCustomer 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 andcustomer segmentsTwo approaches:

– Different supply chains – Tailor supply chain to best meet the needs of each product’s demand




Product Life Cycle

The demand characteristics of a product and the needsof a customer segment change as a product goesthrough its life cycle

Supply chain strategy must evolve throughout the lifecycleEarly: uncertain demand, high margins (time isimportant), product availability is most important, costis secondaryLate: predictable demand, lower margins, price isimportant




Product Life Cycle

Examples: pharmaceutical firm, Intel corporation

As the product goes through the life cycle, the supplychain changes from one emphasizing responsivenessto one emphasizing efficiency




Competitive Changes Over Time

Competitive pressures can change over timeMore competitors may result in an increased emphasison variety at a reasonable price

The Internet makes it easier to offer a wide variety of productsThe supply chain must change to meet these changing

competitive conditions



Obstacles to achieving strategic fit

1. Increasing variety of products2. Decreasing product life cycles3. Increasingly demanding customers for improvement4. Globalization (global supply chain)5. Changing business environment

6. Difficulty executing new strategies

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