© 2007 Pearson Education 2-1 Chapter 2 Supply Chain Performance: Achieving Strategic Fit and Scope Supply Chain Management (5th Edition)

© 2007 Pearson Education 2-2 What is Supply Chain Management? uManaging supply chain flows and assets, to maximize supply chain surplus uWhat is supply chain surplus?

© 2007 Pearson Education 2-3 Competitive and Supply Chain Strategies uCompetitive strategy: defines the set of customer needs a firm seeks to satisfy through its products and services uProduct development strategy: specifies the portfolio of new products that the company will try to develop uMarketing and sales strategy: specifies how the market will be segmented and product positioned, priced, and promoted uSupply 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, competitive strategy, and other functional strategies is important

© 2007 Pearson Education 2-4 The Value Chain: Linking Supply Chain and Business Strategy

© 2007 Pearson Education 2-5 Achieving Strategic Fit uStrategic 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 uA 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 uExample of strategic fit -- Dell

© 2007 Pearson Education 2-6 How is Strategic Fit Achieved? uStep 1: Understanding the customer and supply chain uncertainty uStep 2: Understanding the supply chain uStep 3: Achieving strategic fit

© 2007 Pearson Education 2-7 Step 1: Understanding the Customer and Supply Chain Uncertainty uIdentify the needs of the customer segment being served (e.g. Seven-Eleven vs Sam’s Club) Example: Emergency vs construction order uQuantity of product needed in each lot uResponse time customers will tolerate uVariety of products needed uService level required uPrice of the product

© 2007 Pearson Education 2-8 Step 2: Understanding the Supply Chain uHow does the firm best meet demand? uDimension describing the supply chain is supply chain responsiveness uSupply 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

© 2007 Pearson Education 2-9 Understanding the Supply Chain: Cost- Responsiveness Efficient Frontier HighLow High Responsiveness Cost

© 2007 Pearson Education 2-10 Step 3: Achieving Strategic Fit uStep is to ensure that what the supply chain does well is consistent with target customer’s needs uAll functions in the value chain must support the competitive strategy to achieve strategic fit. uTwo 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

© 2007 Pearson Education 2-11 Comparison of Efficient and Responsive Supply Chains (Table 2.4) EfficientResponsive Primary goalLowest costQuick response Product design strategyMin product costModularity to allow postponement Pricing strategyLower marginsHigher margins Mfg strategyHigh utilizationCapacity flexibility Inventory strategyMinimize inventoryBuffer inventory Lead time strategyReduce but not at expense of greater cost Aggressively reduce even if costs are significant Supplier selection strategyCost and low qualitySpeed, flexibility, quality Transportation strategyGreater reliance on low cost modes Greater reliance on responsive (fast) modes

© 2007 Pearson Education 3-12 Chapter 3 Supply Chain Drivers and Obstacles Supply Chain Management (5th Edition)

© 2007 Pearson Education 3-13 Outline uDrivers of supply chain performance uA framework for structuring drivers uFacilities uInventory uTransportation uInformation uSourcing uPricing uObstacles to achieving fit

© 2007 Pearson Education 3-14 Drivers of Supply Chain Performance uFacilities –places where inventory is stored, assembled, or fabricated –production sites and storage sites uInventory –raw materials, WIP, finished goods within a supply chain –inventory policies uTransportation –moving inventory from point to point in a supply chain –combinations of transportation modes and routes uInformation –data and analysis regarding inventory, transportation, facilities throughout the supply chain –potentially the biggest driver of supply chain performance uSourcing –functions a firm performs and functions that are outsourced uPricing –Price associated with goods and services provided by a firm to the supply chain

© 2007 Pearson Education 3-15 A Framework for Structuring Drivers

© 2007 Pearson Education 3-16 Facilities uRole in the supply chain –the “where” of the supply chain –manufacturing or storage (warehouses) uRole in the competitive strategy –economies of scale (efficiency priority) –larger number of smaller facilities (responsiveness priority) uExample 3.1: Toyota and Honda uComponents of facilities decisions

© 2007 Pearson Education 3-17 Components of Facilities Decisions uLocation –centralization (efficiency) vs. decentralization (responsiveness) –other factors to consider (e.g., proximity to customers) uCapacity (flexibility versus efficiency) uManufacturing methodology (product focused versus process focused) uWarehousing methodology (SKU storage, job lot storage, cross-docking) uOverall trade-off: Responsiveness versus efficiency

© 2007 Pearson Education 3-18 Inventory uRole in the supply chain uRole in the competitive strategy uComponents of inventory decisions

© 2007 Pearson Education 3-19 Inventory: Role in the Supply Chain uInventory exists because of a mismatch between supply and demand uSource of cost and influence on responsiveness uImpact on –material flow time: time elapsed between when material enters the supply chain to when it exits the supply chain –throughput »rate at which sales to end consumers occur »I = RT (Little’s Law) »I = inventory; R = throughput; T = flow time »Example »Inventory and flow time are “synonymous” in a supply chain

© 2007 Pearson Education 3-20 Inventory: Role in Competitive Strategy uIf responsiveness is a strategic competitive priority, a firm can locate larger amounts of inventory closer to customers uIf cost is more important, inventory can be reduced to make the firm more efficient uTrade-off uExample 3.2 – Amazon

© 2007 Pearson Education 3-21 Components of Inventory Decisions uCycle inventory –Average amount of inventory used to satisfy demand between shipments –Depends on lot size uSafety inventory –inventory held in case demand exceeds expectations –costs of carrying too much inventory versus cost of losing sales uSeasonal inventory –inventory built up to counter predictable variability in demand –cost of carrying additional inventory versus cost of flexible production uOverall trade-off: Responsiveness versus efficiency –more inventory: greater responsiveness but greater cost –less inventory: lower cost but lower responsiveness

© 2007 Pearson Education 3-22 Transportation uRole in the supply chain uRole in the competitive strategy uComponents of transportation decisions

© 2007 Pearson Education 3-23 Transportation: Role in the Supply Chain uMoves the product between stages in the supply chain uImpact on responsiveness and efficiency uFaster transportation allows greater responsiveness but lower efficiency uAlso affects inventory and facilities

© 2007 Pearson Education 3-24 Transportation: Role in the Competitive Strategy uIf responsiveness is a strategic competitive priority, then faster transportation modes can provide greater responsiveness to customers who are willing to pay for it uCan also use slower transportation modes for customers whose priority is price (cost) uCan also consider both inventory and transportation to find the right balance uExample 3.3: Blue Nile

© 2007 Pearson Education 3-25 Components of Transportation Decisions uMode of transportation: –air, truck, rail, ship, pipeline, electronic transportation –vary in cost, speed, size of shipment, flexibility uRoute and network selection –route: path along which a product is shipped –network: collection of locations and routes uIn-house or outsource uOverall trade-off: Responsiveness versus efficiency

© 2007 Pearson Education 3-26 Information uRole in the supply chain uRole in the competitive strategy uComponents of information decisions

© 2007 Pearson Education 3-27 Information: Role in the Supply Chain uThe connection between the various stages in the supply chain – allows coordination between stages uCrucial to daily operation of each stage in a supply chain – e.g., production scheduling, inventory levels

© 2007 Pearson Education 3-28 Information: Role in the Competitive Strategy uAllows supply chain to become more efficient and more responsive at the same time (reduces the need for a trade-off) uInformation technology uWhat information is most valuable?

© 2007 Pearson Education 3-29 Components of Information Decisions uPush (MRP) versus pull (demand information transmitted quickly throughout the supply chain) uCoordination and information sharing uForecasting and aggregate planning uEnabling technologies –EDI –Internet –ERP systems –Supply Chain Management software uOverall trade-off: Responsiveness versus efficiency

© 2007 Pearson Education 3-30 Sourcing uRole in the supply chain uRole in the competitive strategy uComponents of sourcing decisions

© 2007 Pearson Education 3-31 Sourcing: Role in the Supply Chain uSet of business processes required to purchase goods and services in a supply chain uSupplier selection, single vs. multiple suppliers, contract negotiation

© 2007 Pearson Education 3-32 Sourcing: Role in the Competitive Strategy uSourcing decisions are crucial because they affect the level of efficiency and responsiveness in a supply chain uIn-house vs. outsource decisions- improving efficiency and responsiveness uExample 3.6: Cisco

© 2007 Pearson Education 3-33 Components of Sourcing Decisions uIn-house versus outsource decisions uSupplier evaluation and selection uProcurement process uOverall trade-off: Increase the supply chain profits

© 2007 Pearson Education 3-34 Pricing uRole in the supply chain uRole in the competitive strategy uComponents of pricing decisions

© 2007 Pearson Education 3-35 Pricing: Role in the Supply Chain uPricing determines the amount to charge customers in a supply chain uPricing strategies can be used to match demand and supply

© 2007 Pearson Education 3-36 Sourcing: Role in the Competitive Strategy uFirms can utilize optimal pricing strategies to improve efficiency and responsiveness uLow price and low product availability; vary prices by response times uExample 3.7: Amazon

© 2007 Pearson Education 3-37 Components of Pricing Decisions uPricing and economies of scale uEveryday low pricing versus high-low pricing uFixed price versus menu pricing uOverall trade-off: Increase the firm profits

© 2007 Pearson Education 3-38 Obstacles to Achieving Strategic Fit uIncreasing variety of products uDecreasing product life cycles uIncreasingly demanding customers uFragmentation of supply chain ownership uGlobalization uDifficulty executing new strategies

© 2007 Pearson Education 3-39 Summary uWhat are the major drivers of supply chain performance? uWhat is the role of each driver in creating strategic fit between supply chain strategy and competitive strategy (or between implied demand uncertainty and supply chain responsiveness)? uWhat are the major obstacles to achieving strategic fit? uIn the remainder of the course, we will learn how to make decisions with respect to these drivers in order to achieve strategic fit and surmount these obstacles