S UPPLY C HAIN S TRATEGY Dr. Debadyuti Das Associate Professor Faculty of Management Studies University of Delhi –

V ALUE C HAIN

THE VALUE CHAIN: LINKING SUPPLY CHAIN AND BUSINESS STRATEGY 3 New Product Development Marketing and Sales Operations Distribution Service Finance, Accounting, Information Technology, Human Resources Business Strategy New Product Strategy Marketing Strategy Supply Chain Strategy

C OMPETITIVE AND S UPPLY C HAIN S TRATEGIES Competitive strategy: defines the set of customer needs a firm seeks to satisfy through its products and services Product development strategy: specifies the portfolio of new products that the company will try to develop Marketing and sales strategy: specifies how the market will be segmented and product positioned, priced, and promoted 4

C OMPETITIVE AND S UPPLY C HAIN S TRATEGIES Supply 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 5

E XAMPLES OF SC STRATEGY Dell’s decision to sell direct. Gateway’s decision to sell PCs through retailers. Cisco’s decision to use contract manufacturers. Amazon’s decision to build warehouses to stock some products and to continue using distributors as a source of other products. Toyota’s decision to have production facilities in each of its major markets.

A CHIEVING S TRATEGIC F IT 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 provide the capabilities to execute the desired strategy Example of strategic fit -- Dell 7

H OW IS S TRATEGIC F IT A CHIEVED ? Step 1: Understanding the customer and supply chain uncertainty Step 2: Understanding the supply chain capabilities Step 3: Achieving strategic fit 8

S TEP 1: U NDERSTANDING THE C USTOMER AND S UPPLY C HAIN U NCERTAINTY Identify the needs of the customer segment being served Lot size Response time Variety of products Service level Price of the product Innovation 9

S TEP 2: U NDERSTANDING THE S UPPLY C HAIN C APABILITIES 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 meet a very high service level 10

S TEP 2: U NDERSTANDING THE S UPPLY C HAIN C APABILITIES There is a cost to achieving responsiveness Supply chain efficiency: cost of making and delivering the product to the customer Increasing responsiveness results in higher costs that lowers efficiency Cost-responsiveness efficiency frontier Supply chain responsiveness spectrum Second step to achieving strategic fit is to map the supply chain on the responsiveness spectrum 11

U NDERSTANDING THE S UPPLY C HAIN : C OST - R ESPONSIVENESS E FFICIENT F RONTIER 12 HighLow High Responsiveness Cost

R ESPONSIVENESS S PECTRUM 13 Integrated steel mill Dell Highly efficient Highly responsive Somewhat efficient Somewhat responsive Hanes apparel Most automotive production

S TEP 3: A CHIEVING S TRATEGIC F IT Step is to ensure that what the supply chain does well is consistent with target customer’s needs Uncertainty/Responsiveness map Zone of strategic fit Example: Dell, Barilla 14

A CHIEVING S TRATEGIC F IT S HOWN ON THE U NCERTAINTY /R ESPONSIVENESS M AP 15 uncertainty spectrum Responsive supply chain Efficient supply chain Certain demand Uncertain demand Responsiveness spectrum Zone of Strategic Fit

SCM S TRATEGIES – E FFICIENT VS. R ESPONSIVE Responsive Strategy: 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 Efficient Strategy: Focus is on improving efficiency and reducing cost by emphasizing on - procuring in bulk - manufacturing in bulk - distributing in bulk etc. by making use of economies of scale 16

SCM S TRATEGIES – E FFICIENT VS. R ESPONSIVE Responsive strategy is useful for products having high level of demand uncertainty, e.g. innovative products (Dell computer, Popular music, Fashion apparel, solar- powered wireless communication devices, mobility devices for children with disability etc.) Efficient strategy is useful for products having a reasonable level of stable demand, e.g. functional products (Soap, detergent, tooth-paste, rice, wheat etc.) 17

S TEP 3: A CHIEVING S TRATEGIC F IT All functions in the value chain must support the competitive strategy to achieve strategic fit Two 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 18

P RODUCT - SUPPLY CHAIN MATRIX Right Supply Chain Inefficient Supply Chain Ineffective Supply Chain Right Supply Chain 19 Functional products Innovative products Efficient Strategies Responsive strategies

SC S TRATEGY : A DIFFERENT PERSPECTIVE Push-based supply chain Pull-based supply chain Push-Pull supply chain 20

T HE O LD P ARADIGM : P USH S TRATEGIES Production decisions based on long-term forecasts Ordering decisions based on inventory & forecasts What are the problems with push strategies? Inability to meet changing demand patterns Obsolescence The bullwhip effect: Excessive inventory Excessive production variability Poor service levels

A N EWER P ARADIGM : P ULL S TRATEGIES Production is demand driven Production and distribution coordinated with true customer demand Firms respond to specific orders Pull Strategies result in: Reduced lead times (better anticipation) Decreased inventory levels at retailers and manufacturers Decreased system variability Better response to changing markets But: Harder to leverage economies of scale Doesn ’ t work in all cases

P USH AND P ULL S YSTEMS What are the advantages of push systems? What are the advantages of pull systems? Is there a system that has the advantages of both systems?

A NEW S UPPLY C HAIN P ARADIGM A shift from a Push System... Production decisions are based on forecast …to a Push-Pull System Initial portion of the supply chain is replenished based on long-term forecasts For example, parts inventory may be replenished based on forecasts Final supply chain stages based on actual customer demand. For example, assembly may be based on actual orders.

P USH -P ULL S UPPLY C HAINS Push-Pull Boundary PUSH STRATEGYPULL STRATEGY Low Uncertainty High Uncertainty The Supply Chain Time Line Customers Suppliers

C ONSIDER T WO PC M ANUFACTURERS : Build to Stock Forecast demand Buys components Assembles computers Observes demand and meets demand if possible. A traditional push system Build to order Forecast demand Buys components Observes demand Assembles computers Meets demand A push-pull system

P USH -P ULL S TRATEGIES The push-pull system takes advantage of the rules of forecasting: Forecasts are always wrong The longer the forecast horizon, the worst is the forecast Aggregate forecasts are more accurate The Risk Pooling Concept Delayed differentiation is another example Consider Benetton sweater production

W HAT IS THE B EST S TRATEGY ? Pull Push Pull Push I Computer II IVIII Demand uncertainty (C.V.) Delivery cost Unit price L H HLHL Economies of Scale

S ELECTING THE B EST SC S TRATEGY Higher demand uncertainty suggests pull Higher importance of economies of scale suggests push High uncertainty/ EOS not important such as the computer industry implies pull Low uncertainty/ EOS important such as groceries implies push Demand is stable Transportation cost reduction is critical Pull would not be appropriate here.

S ELECTING THE B EST SC S TRATEGY Low uncertainty but low value of economies of scale (high volume books and CDs) Either push strategies or push/pull strategies might be most appropriate High uncertainty and high value of economies of scale For example, the furniture industry How can production be pull but delivery push? Is this a “pull-push” system?

L OCATING THE P USH -P ULL B OUNDARY The push section: Uncertainty is relatively low Economies of scale important Long lead times Complex supply chain structures Thus Management based on forecasts is appropriate Focus is on cost minimization Achieved by effective resource utilization – supply chain optimization

L OCATING THE P USH -P ULL B OUNDARY The pull section: High uncertainty Simple supply chain structure Short lead times Thus Reacting to realized demand is important Focus on service level Flexible and responsive approaches

L OCATING THE P USH -P ULL B OUNDARY The push section requires: Supply chain planning Long term strategies The pull section requires: Order fulfillment processes Customer relationship management Buffer inventory at the boundaries: The output of the tactical planning process The input to the order fulfillment process.

L OCATING THE P USH -P ULL B OUNDARY

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