Supply Chain Performance: Achieving Strategic Fit and Scope Supply Chain Management Supply Chain Performance: Achieving Strategic Fit and Scope

Outline Competitive and supply chain strategies Achieving strategic fit

Competitive and Supply Chain Strategies Competitive strategy: defines the set of customer needs a firm seeks to satisfy through its products and services, relative to its competitors. Wallmart – low price, product availability Dell – Customization and variety Priories of the customer is the determining factor in competitive strategy.

Competitive and Supply Chain Strategies Supply chain strategy: Determines the nature of material procurement, transportation of materials, manufacture of product or creation of service, distribution of product. Determines the broad structure, what the processes within company must focus “to do well”, and what roles each entity in the supply chain should play. Supply chain strategy is simply the collection of the strategies for new product development, marketing, operations, distributions, and service. Consistency and support between supply chain strategy, competitive strategy, and other functional strategies is important.

Example; 7- Eleven Japan A chain of small stores selling groceries and variety of products and services. Competitive strategy; convenience and easy access to stores, availability of variety of products and services (like bill payment). Supply chain strategy; emphasizing the convenience and variety in marketing, high density of stores, excellent information system, very responsive forecasting and inventory management system, flexible distribution system in delivery schedules.

Example- Dell Competitive strategy; Customization and variety at reasonable price. Supply chain strategy; broad structure-direct sale to customer, built-to-order system to achieve the customization and variety, using internet (or phone) and e-business for customization, no finished product inventory, low component inventories, close relations and information sharing with suppliers for speedy delivery and reduced defects, using parcel carriers for speedy delivery, a few assembly plants for economies of scale in production.

Example –Wall Mart Competitive strategy; high availability of variety of reasonable quality products at low price. Supply chain strategy; frequent replenishment to stores, distribution depots close to store, uses its own fleet for transportation, cross docking strategy at depots, close collaboration and information sharing with its suppliers using their excellent information system.

Achieving Strategic Fit Introduction How is strategic fit achieved? Other issues affecting strategic fit

Achieving Strategic Fit Consistency between customer priorities of competitive strategy and supply chain capabilities specified by the supply chain strategy Competitive and supply chain strategies should have the same goals All functional strategies that make up the supply chain strategy must be aligned A 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 Example; Marketing is publicizing product variety and quick delivery while distribution is aiming for low cost means of transportation. (slow modes of transportation, order consolidations)

DELL example for strategic fit Competitive strategy; Customization and variety Supply chain strategy; Two extreme options; Efficient supply chain for low cost products (consolidated production and distribution, dedicated production capacity, limited variety, slow modes of distribution, standard products etc.) Responsive supply chain; Flexible production capacity, fast distribution options, product variety, designing easily customizable products with as many as possible common components) Second option of course better fits with competitive strategy of Dell.

How is Strategic Fit Achieved? Step 1: Understanding the customer and supply chain uncertainty 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 being served A customer who usually buys detergent from a convenience store v.s. A customer who goes to Metro and buy detergent in larger quantities at cheaper price? Emergency repair needs v.s. Construction related orders? What are the characteristics of these types of customers? In general customer demand varies in the following attributes; Quantity of product needed in each lot Response time customers will tolerate Variety of products needed Service level required Price of the product Desired rate of innovation in the product

Step 1: Understanding the Customer and Supply Chain Uncertainty We will try to combine all of these attributes in one metric; implied demand uncertainty Demand uncertainty: uncertainty of customer demand for a product Implied demand uncertainty: resulting uncertainty for the supply chain given the portion of the demand the supply chain must handle. First step to strategic fit is to understand customers by mapping their demand on the implied uncertainty spectrum

Achieving Strategic Fit Understanding the Customer Lot size Response time Service level Product variety Price Innovation Demand channels Implied Demand Uncertainty

Impact of Customer Needs on Implied Demand Uncertainty (Table 2.1) Causes implied demand uncertainty to increase because … Range of quantity increases Wider range of quantity implies greater variance in demand Lead time decreases Less time to react to orders Variety of products required increases Demand per product becomes more disaggregated Number of channels increases Total customer demand is now disaggregated over more channels Rate of innovation increases New products tend to have more uncertain demand Required service level increases Firm now has to handle unusual surges in demand

Levels of Implied Demand Uncertainty

Correlation Between Implied Demand Uncertainty and Other Attributes Low Implied Uncertainty High Implied Uncertainty Product margin Low High Avg. forecast error 10% 40%-100% Avg. stock out rate 1%-2% 10%-40%

Step 2: Understanding the Supply Chain How does the firm best meet demand? Dimension describing the supply chain is supply chain responsiveness 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 Handle supply problems (yield, untimely delivery of components, breakdowns etc.)

Step 2: Understanding the Supply Chain There is a cost to achieving responsiveness Increasing responsiveness results in higher costs that lower efficiency Second step to achieving strategic fit is to map the supply chain on the responsiveness spectrum

Responsiveness Spectrum (Figure 2.4) Highly efficient Somewhat efficient Somewhat responsive Highly responsive Integrated steel mill Advance Production Schedules, Less variety and flexibilty Hanes Apparel Make to stock manufacurer with a lead time in weeks Most automotive Production Variety of products delivered in weeks Seven-Eleven Japan Variety of products by locaiton and by the time of the day, quick replenishments

Examples Responsive supply chains; Efficient supply chain; 7 Eleven- Japan; , variety of products; replenishes stores three times a day, with breakfast items, lunch items, and dinner items, provide different services. Short lead times; a store is replenished in less then 12 hours after the store manager gives an order. Dell Variety of products; customers designs their own PCs. Short lead times; uses parcel carriers for transportation to deliver a PC to the customer in a week on the average. Efficient supply chain; BİM stores Less workers at stores, less promotional costs, displaying products in boxes rather than stacking them on shelves, limited variety (about 600), reasonable quality products, stores not on main streets but in secondary places to keep the costs down.

Step 3: Achieving Strategic Fit Step is to ensure that what the supply chain does well (supply chain strategy) is consistent with target customer’s needs (competitive strategy) Fig. C: Zone of strategic fit Examples: Dell; High implied demand uncertainty and responsive supply chain Barilla (Italian pasta manufacturer); Low level of demand uncertainty and efficient supply chain

Achieving Strategic Fit Shown on the Uncertainty/Responsiveness Map (Fig. C) Implied uncertainty spectrum Responsive supply chain Efficient supply chain Certain demand Uncertain demand Responsiveness spectrum Zone of Strategic Fit

Step 3: Achieving Strategic Fit In achieving strategic fit, different levels in the supply chain can be assigned different responsiveness and efficiency. Examples; IKEA; Swedish furniture retailer Targets customer who wants stylish furniture at reasonable price Limited variety to reduce the supply uncertainty Large stores where all styles are stocked and customer demand is satisfied from stocks. Stable and predictable orders to its manufacturers located in low-cost countries. Responsiveness provided by the stocks in store that absorbs the demand uncertainty. Manufacturers can be efficient because of stable and predictable

Step 3: Achieving Strategic Fit Example; England Inc.; Furniture manufacturer in Tennessee England manufactures and delivers thousand of sofas and chairs to orders with three weeks lead time. England’s retailers let customer to select from variety of products with a promise of quick delivery. Retailers carry little inventory All the uncertainty is passed to England Inc. And Retailers can be efficient England Inc. can either hold high levels of raw material inventories to absorb the uncertainty and chose not to be efficient and allows its suppliers to be efficient, or passes all the uncertainty to its suppliers by holding low levels of raw materials and England itself works efficiently.

Step 3: Achieving Strategic Fit 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 and Responsive Supply Chains Primary goal Lowest cost Quick response Product design strategy Min product cost Room 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