Supply Chain Performance: Achieving Strategic Fit and Scope ECT 7240 Week 2 Supply Chain Performance: Achieving Strategic Fit and Scope SEG 4610 Supply Chain Management Janny Leung

Supply Chain Management Strategic Decisions Strategic Decisions are ones that keep an organisation matched to its environment. Motivation: Assure long term survival Ensure profit growth SEG 4610 Supply Chain Management

The Value Chain in a company New Product Develop-ment Marketing and Sales Operations Distribution Service Supply Chain Strategy Finance, accounting, Info Technologies, human resources SEG 4610 Supply Chain Management

Supply Chain Management Competitive Strategy A company’s competitive strategy defines the set of customer needs that it seeks to satisfy through its products and services. Compaq (immediate availability) vs. Dell (customisation) Park’N’Shop vs. CitiSuper Based on the customers’ priorities Targets one or more customer segments Aim: provide goods/services to satisfy these customers’ needs SEG 4610 Supply Chain Management

Competitive Dimensions Cost Quality Time Flexibility/Variety Strategic Positioning Defines those positions that a firm wants to occupy in the competitive product space. SEG 4610 Supply Chain Management

Supply Chain Management Corporate Strategy, Competitive Priorities and Functional Inter-relationships Market analysis segmentation needs assessment Socioeconomic and business environment Corporate strategy missions goals distinctive Future directions global strategy new products/services Competitive priorities cost quality time flexibility Capabilities current needed plans Functional area strategies SEG 4610 Supply Chain Management

Terry Hill (London Business School): Order Winners & Qualifiers Order Qualifiers are those (minimum) criteria that a company must meet to be considered as a possible supplier (e.g. ISO 9000). Order winners are those criteria that wins the orders. Invariably due to re-directing competitive priorities SEG 4610 Supply Chain Management

Functional Strategies Product development Product portfolio? Outsourced or internal development? Marketing Customer segments? Products/price/promotion? Competitors? Finance Acquisition and allocation of resources Supply Chain Procurement, production, delivery and service SEG 4610 Supply Chain Management

Developing an Operations Strategy (Terry Hill) 1. Define corporate objectives. 2. Determine marketing strategies (strategic positioning). 3. Assess how different products qualify in their respective markets and win orders against competitors. 4. Establish appropriate operational processes for product manufacture and delivery. 5. Provide the operational infrastructure to support production/delivery. SEG 4610 Supply Chain Management

Supply Chain Management Strategic Fit Strategic fit means consistency between the competitive advantage that a firm seeks and the process capabilities and managerial policies that it uses to achieve that advantage. Key to success: Competitive strategy and functional strategies must support each other and fit as a co-ordinated overall strategy. Each function must structure its processes to be able to execute these strategies well. SEG 4610 Supply Chain Management

Achieving Strategic Fit Understand the customer Customer needs for targeted segments? Define service requirements and desired costs Understand the supply chain Operational characteristics Performance vs. customer needs Achieving strategic fit Re-structure supply chain Alter competitive strategy SEG 4610 Supply Chain Management

Understanding the customer Lot size Response time Service level Product variety Price Innovation Implied Demand Uncertainty SEG 4610 Supply Chain Management

Implied vs. “real” demand uncertainty Implied demand uncertainty is the uncertainty that exists due to the portion of demand that the supply chain is required to meet. Affected by: Portion of demand (Market segment) handled by supply chain Attributes desired by customers SEG 4610 Supply Chain Management

Implied Uncertainty Spectrum Low Implied Demand Uncertainty Somewhat Certain Demand High Implied Demand Uncertainty Somewhat Uncertain Demand Purely functional products Established products New models of existing goods Entirely new products Crest toothpaste Gasoline New Ford Taurus Palm Pilot SEG 4610 Supply Chain Management

Supply Chain Management Relationship between Demand Characteristics and Implied Demand Uncertainty (Fisher) Attribute Low Implied Uncertainty High Implied Uncertainty Profit margin Low High Average forecast error 10% 40% to 100% Average stockout rate 1% to 2% 10% to 40% Average forced end-of-season markdown 0% 10% to 25% SEG 4610 Supply Chain Management

Achieving Strategic Fit Understand the customer Map where their demand is located on the implied uncertainty spectrum Understand the supply chain Achieving strategic fit SEG 4610 Supply Chain Management

Understanding the Supply Chain Supply chain responsiveness is its ability to: Respond to wide range of quantities demanded Meet short lead times Manufacture large variety of products Meet high service level Innovate – anticipate customers’ demand Responsiveness comes at a cost … SEG 4610 Supply Chain Management

Understanding the Supply Chain Supply chain efficiency is the cost of making and delivering a product to the customer. Responsiveness – cost efficient frontier Tradeoff between cost efficiency and responsiveness => Supply chain strategy -> level of responsiveness offered SEG 4610 Supply Chain Management

Responsiveness Spectrum Highly efficient Somewhat efficient Somewhat Responsive Highly responsive Advance production schedule; low variety or flexibility Make-to-stock; Long production lead time (months) Mix model production; Production lead time in weeks Make-to-order; Lead time in days Automobile production Dell PC Glass production M&S underwear SEG 4610 Supply Chain Management

Achieving Strategic Fit Understand the customer Map where their demand is located on the implied uncertainty spectrum Understand the supply chain Map where the supply chain capability is located on the responsiveness spectrum Achieving strategic fit SEG 4610 Supply Chain Management

Achieving Strategic Fit Responsive Supply Chain Strategic Fit Efficient Supply Chain Certain demand Uncertain SEG 4610 Supply Chain Management

Efficient vs. Responsive Supply Chains Strategy Efficient Supply Chains Responsive Supply Chains Primary goal Meet (predictable) demand at low cost Respond quickly to demand Product design Max performance at min cost Flexible design (modularity, mix-&-match) Pricing Lower margin Higher margin Manufacturing High facility utilisation (low average cost) Capacity flexibility and cushion Inventory Minimise inventory levels Maintain buffer inventory to meet unexpected demand Lead Time Reduce, but not at the expense of production costs Aggressively reduce Supplier Select based on cost and quality Select based on speed, flexibility and quality Transportation Low costs modes Responsive and speedy modes SEG 4610 Supply Chain Management

Achieving Strategic Fit Understand the customer Map where their demand is located on the implied uncertainty spectrum Understand the supply chain Map where the supply chain capability is located on the responsiveness spectrum Achieving strategic fit Match supply chain responsiveness to implied demand uncertainty in zone of strategic fit. Other functional strategies must also be coordinated. SEG 4610 Supply Chain Management

Outputs of Strategy (Terry Hill) Review of implications for manufacturing processes and infrastructure support for current and future products Assess degree of match between capabilities and order-winning and order-qualifying needs Continual monitor changes in match and mismatch Necessary operational re-design, infrastructure investments, change schedule integrated into corporate strategy in co-ordination with other functional strategies SEG 4610 Supply Chain Management

Supply Chain Management There is no SINGLE right supply chain for everyone … There is only a right supply chain for your given competitive strategic position. SEG 4610 Supply Chain Management

Other issues affecting Strategic Fit Company offers multiple products to different customer segments Grainger: machine parts to Boeing, Ford and also small manufacturers Fast-moving products warehouses dispersed; slow moving items stored centrally Product life cycles Demand characteristics different at different stages of life cycle Competitive strategic positioning will also change Supply chain and other functional strategies must adapt as product enters different stages of its life cycle Competitors’ actions change over time New products/services Customers’ expectations changes SEG 4610 Supply Chain Management

Supply Chain Management Strategic Scope Suppliers Manufacturers Distributors Retailers Customers Competitive Strategy Product Development Strategy Supply Chain Strategy Marketing Strategy SEG 4610 Supply Chain Management

Expanding Strategic Scope Intra-company intra-operations scope: minimize local costs Intra-company intra-functional scope: minimize functional costs Intra-company inter-functional scope: Maximize company profits Inter-company inter-functional scope: Maximize supply chain surplus The inter-company view essential as competition is not company vs company ,but supply chain vs supply chain The broader inter-company scope increases the size of the surplus to be shared among all stages of the supply chain SEG 4610 Supply Chain Management

Drivers of Supply Chain Performance Efficiency Responsiveness inventory transportation facilities information impact on supply chain performance role in competitive strategy decision components SEG 4610 Supply Chain Management

Supply Chain Management Inventory Present throughout the supply chain: Raw materials, work-in-process, finished goods at manufacturers/distributors/retailers, etc. Supply Chain role: Inventory reflects a mismatch of supply and demand Purposeful: economies-of-scale, anticipate future demand Related to throughput and “flow time” Competitive Strategy role: location and amount of finished goods inventory impacts product availability (responsiveness) centralised/distributed storage impacts costs Decision Components: cycle inventory : inventory to meet demand between shipments safety stock: inventory held to meet unexpected demand seasonal inventory: inventory to meet predictably variable demand SEG 4610 Supply Chain Management

Supply Chain Management Transportation Supply Chain role: Moves product between different stages in a supply chain Faster transportation modes decreases “flow time” Competitive Strategy role: More frequent deliveries increases responsiveness Transportation system structure and operation must match the efficiency-responsiveness balance to competitive strategic position Decision Components: Transportation mode: air, truck, rail, ship, pipeline, Electronic delivery Network design and route selection In-house or out-source SEG 4610 Supply Chain Management

Supply Chain Management Facilities Supply Chain role: Locations where “value-added” takes place in a supply chain Manufacturing (transformation), Warehousing (storage) Competitive Strategy role: Number and dispersion of warehouses affects costs facilities, management, inventory, transportation Location proximity to customers affects responsiveness Global and local presence affects customers’ perception Decision Components: Location Capacity Manufacturing Structure (Process Choices) Warehousing Operations storage by SKU or job-lots cross-docking SEG 4610 Supply Chain Management

Supply Chain Management Information Supply Chain role: Information connects the various stages of a supply chain Daily operational decisions based on information about forecasted demand and product availability Competitive Strategy role: New info channels (e.g. Internet B2B platforms) allow customers to design their customised products (increases responsiveness) Data collection increases understanding of customers’ preference target market segments improves demand forecasts Decision Components: Choice of enabling technologies EDI, Internet, ERP (SCM) software Push vs pull supply chains impacts info system design Co-ordination and information sharing Forecasting SEG 4610 Supply Chain Management

Major Obstacles to Achieving Fit Multiple owners and/or incentives in a supply chain Local optimisation and lack of global fit Customer fragmentation Increased product variety Shortening life-cycles Increasingly demanding customers Increasing implied demand uncertainty Higher service expectations Globalisation Complexity of supply chain Increased competition Increased difficulty in executing new strategies SEG 4610 Supply Chain Management

Dealing with obstacles Multiple owners Contractual co-ordination Information co-ordination Customer fragmentation Mass customisation Tailored logistics Globalisation Global companies, strategic partnerships First-mover advantage Company culture, investment in human resources SEG 4610 Supply Chain Management

Supply Chain Management E-Commerce Strategy What is E-commerce? Commerce transacted over the Internet Product information Order placement and/or negotiation Order tracking Order fulfilment Payment SEG 4610 Supply Chain Management

Revenue Impact of E-Commerce Length of supply chain Product Info Time to market Price/Contract Negotiation Order placement and tracking Order fulfilment Payment SEG 4610 Supply Chain Management

Cost Impact of E-Commerce Facility Site and processing costs Inventory Levels and kinds Transportation Inbound/out bound logistics Infrastructure Information Sharing Co-ordination SEG 4610 Supply Chain Management

Supply Chain Management Summary Competitive Strategic Positioning Order-winners and qualifiers Supply Chain Performance Efficiency vs Responsiveness Co-ordinated strategies Strategic Fit customers: implied demand uncertainty spectrum supply chain: responsiveness-cost spectrum Challenges E-commerce SEG 4610 Supply Chain Management

Supply Chain Management References Fisher, M. L., ‘What is the right supply chain for your product?’, Harvard Business Review, Mar-Apr 1997. Marien, E.J., ‘The four supply chain enablers’, Supply Chain Management Review, Mar-Apr, 2000, 60-68. Hill, T., Manufacturing Operations Strategy: Text and Cases, McGraw-Hill, 2009. SEG 4610 Supply Chain Management