© 2004 Prentice-Hall, Inc. 2-1 Chapter 2 Supply Chain Performance: Achieving Strategic Fit and Scope Supply Chain Management (2nd Edition)

© 2004 Prentice-Hall, Inc. 2-2 Outline u Competitive and supply chain strategies u Achieving strategic fit u Expanding strategic scope

© 2004 Prentice-Hall, Inc. 2-3 What is Supply Chain Management? u Managing supply chain flows and assets, to maximize supply chain value. u What is supply chain value?

© 2004 Prentice-Hall, Inc. 2-4 Competitive and Supply Chain Strategies u Competitive strategy: –defines the set of customer needs a firm seeks to satisfy through its products and services Low cost, Rapid Response, Product Differentiation Ex: Migros versus BIM HP versus Dell u Supply chain strategy: –determines the nature of material procurement, transportation of materials, manufacture of product or creation of service, distribution of product u Consistency and support between supply chain strategy, competitive strategy, and other functional strategies is important!

© 2004 Prentice-Hall, Inc. 2-5 The Value Chain: Linking Supply Chain and Business Strategy New Product Development Marketing and Sales Operations Distribution Service Finance, Accounting, Information Technology, Human Resources Competitive Strategy New Product Strategy Marketing Strategy Supply Chain Strategy

© 2004 Prentice-Hall, Inc. 2-6 u Product development strategy: specifies the portfolio of new products that the company will try to develop u Marketing and sales strategy: specifies how the market will be segmented and product positioned, priced, and promoted

© 2004 Prentice-Hall, Inc. 2-7 Supply Chain Strategy Traditionally, SC strategy includes -Suppliers Strategy -Operations Strategy -Logistics Strategy regarding inventory, transportation, operating facilities, information flows.

© 2004 Prentice-Hall, Inc. 2-8 Achieving Strategic Fit u What is strategic fit? u How is it achieved? u Other issues affecting strategic fit

© 2004 Prentice-Hall, Inc. 2-9 Achieving Strategic Fit u 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 u A company may fail because of a lack of strategic fit u Example of strategic fit -- Dell

© 2004 Prentice-Hall, Inc How is Strategic Fit Achieved? u Step 1: Understanding the customer and supply chain uncertainty u Step 2: Understanding the supply chain capabilities u Step 3: Achieving strategic fit

© 2004 Prentice-Hall, Inc Step 1: Understanding the Customer and Supply Chain Uncertainty u Identify the needs of the customer segment being served by 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 Ex: 7-Eleven vs. Wallmart

© 2004 Prentice-Hall, Inc Step 1: Understanding the Customer and Supply Chain Uncertainty u Understand the overall attributes of customer demand u Demand uncertainty: uncertainty of customer demand for a product u Implied demand uncertainty: resulting uncertainty for the supply chain due to the portion of the demand the supply chain is required to handle and attributes the customer desires Ex: A firm supplying only emergency orders for a product faces higher implied demand uncertainty then when there is long lead time. Ex: Imputed demand uncertainty increases with service level, but demand uncertainty does not change.

© 2004 Prentice-Hall, Inc Step 1: Understanding the Customer and Supply Chain Uncertainty u Implied demand uncertainty also related to customer needs and product attributes u Table 2.1 u Figure 2.2 u Table 2.2 u First step to strategic fit is to understand customers by mapping their demand on the implied uncertainty spectrum

© 2004 Prentice-Hall, Inc u Understanding the Customer –Lot size –Response time –Service level –Product variety –Price –Innovation Implied Demand Uncertainty Step 1: Understanding the Customer and Supply Chain Uncertainty

© 2004 Prentice-Hall, Inc Impact of Customer Needs on Implied Demand Uncertainty (Table 2.1) Customer NeedCauses implied demand uncertainty to increase because … Range of quantity increasesWider range of quantity implies greater variance in demand Lead time decreasesLess time to react to orders Variety of products required increasesDemand per product becomes more disaggregated Number of channels increasesTotal customer demand is now disaggregated over more channels Rate of innovation increasesNew products tend to have more uncertain demand Required service level increasesFirm now has to handle unusual surges in demand

© 2004 Prentice-Hall, Inc Levels of Implied Demand Uncertainty (Figure 2.2) Low High Price Responsiveness Customer Need Implied Demand Uncertainty Detergent Long lead time steel Purely functional products High Fashion Palm Pilot Entirely new products

© 2004 Prentice-Hall, Inc Correlation Between Implied Demand Uncertainty and Other Attributes (Table 2.2) AttributeLow Implied Uncertainty High Implied Uncertainty Product marginLowHigh Avg. forecast error10%40%-100% Avg. stockout rate1%-2%10%-40% Avg. forced season- end markdown 0%10%-25%

© 2004 Prentice-Hall, Inc Step 2: Understanding the Supply Chain u How does the firm best meet demand? u Dimension describing the supply chain is supply chain responsiveness u 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

© 2004 Prentice-Hall, Inc Step 2: Understanding the Supply Chain u There is a cost of achieving responsiveness u Supply chain efficiency: cost of making and delivering the product to the customer u Increasing responsiveness results in higher costs that lower efficiency u Figure 2.3: cost-responsiveness efficient frontier u Figure 2.4: supply chain responsiveness spectrum u Second step to achieving strategic fit is to map the supply chain on the responsiveness spectrum

© 2004 Prentice-Hall, Inc Understanding the Supply Chain: Cost- Responsiveness Efficient Frontier HighLow High Responsiveness Cost

© 2004 Prentice-Hall, Inc Step 3: Achieving Strategic Fit u Step is to ensure that what the supply chain does well is consistent with target customer’s needs u Fig. 2.5: Uncertainty/Responsiveness map u Fig. 2.6: Zone of strategic fit u Examples: Dell, Barilla

© 2004 Prentice-Hall, Inc Achieving Strategic Fit Shown on the Uncertainty/Responsiveness Map (Fig. 2.6) Implied uncertainty spectrum Responsive supply chain Efficient supply chain Certain demand Uncertain demand Responsiveness spectrum Zone of Strategic Fit

© 2004 Prentice-Hall, Inc Step 3: Achieving Strategic Fit u All functions in the value chain must support the competitive strategy to achieve strategic fit – Fig. 2.7 u Two extremes: Efficient supply chains (Barilla) and responsive supply chains (Dell) – Table 2.3 u 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

© 2004 Prentice-Hall, Inc Comparison of Efficient and Responsive Supply Chains (Table 2.3) 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

© 2004 Prentice-Hall, Inc Other Issues Affecting Strategic Fit u Multiple products and customer segments u Product life cycle u Competitive changes over time

© 2004 Prentice-Hall, Inc Multiple Products and Customer Segments u Firms sell different products to different customer segments (with different implied demand uncertainty) u The supply chain has to be able to balance efficiency and responsiveness given its portfolio of products and customer segments u Two approaches: –Different supply chains if the segments are large enough –Tailor supply chain to best meet the needs of each product’s demand, i.e., share some links.

© 2004 Prentice-Hall, Inc. Tayloring the Supply Chain Consider the case where some products require higher responsiveness and some don’t. Products requiring high responsiveness may be  shipped using a fast mode of transpostation, like FedEx.  manufactured using flexible processes, whereas the others may be produced by more efficient processes.  stored at decentralized warehouses close to the customer. 2-27

© 2004 Prentice-Hall, Inc Product Life Cycle u The demand characteristics of a product and the needs of a customer segment change as a product goes through its life cycle u Supply chain strategy must evolve throughout the life cycle u Early: uncertain demand, high margins (time is important), product availability is most important, cost is secondary u Late: predictable demand, lower margins, price is important

© 2004 Prentice-Hall, Inc Product Life Cycle u Examples: pharmaceutical firms, Intel u As the product goes through the life cycle, the supply chain changes from one emphasizing responsiveness to one emphasizing efficiency

© 2004 Prentice-Hall, Inc. PowerPoint presentation to accompany Heizer/Render – Principles of Operations Management, 5e, and Operations Management, 7e © 2004 by Prentice Hall, Inc., Upper Saddle River, N.J Strategy and Issues During a Product’s Life

© 2004 Prentice-Hall, Inc Competitive Changes Over Time u Competitive pressures can change over time u More competitors may result in an increased emphasis on variety at a reasonable price u The Internet makes it easier to offer a wide variety of products u The supply chain must change to meet these changing competitive conditions

© 2004 Prentice-Hall, Inc Expanding Strategic Scope u Scope of strategic fit –The functions and stages within a supply chain that devise an integrated stategy with a shared objective –One extreme: each function at each stage develops its own strategy –Other extreme: all functions in all stages devise a strategy jointly u Five categories: –Intracompany intraoperation scope –Intracompany intrafunctional scope –Intracompany interfunctional scope –Intercompany interfunctional scope –Flexible interfunctional scope

© 2004 Prentice-Hall, Inc Strategic Scope Suppliers ManufacturerDistributorRetailerCustomer Competitive Strategy Product Dev. Strategy Supply Chain Strategy Marketing Strategy

© 2004 Prentice-Hall, Inc Intracompany Intraoperational Scope u One operation within a functional area in a company u Each operation within each stage of the supply chain devises a strategy independently and attempts to optimize its own performance independently u Usually results in different operations having conflicting objectives – does not maximize total supply chain profits u Figure 2.9

© 2004 Prentice-Hall, Inc Strategic Scope: Intracompany Intraoperation Scope SuppliersManufacturerDistributorRetailerCustomer Competitive Strategy Product Dev. Strategy Supply Chain Strategy Marketing Strategy

© 2004 Prentice-Hall, Inc Intracompany Intrafunctional Scope u Strategic fit is expanded to include all operations within a function u Attempt to maximize performance for the entire function u Figure 2.10

© 2004 Prentice-Hall, Inc Strategic Scope: Intracompany Intrafunctional Scope SuppliersManufacturerDistributorRetailerCustomer Competitive Strategy Product Dev. Strategy Supply Chain Strategy Marketing Strategy

© 2004 Prentice-Hall, Inc Intracompany Interfunctional Scope u All functional strategies within a company are developed to support each other and the company’s competitive strategy u Strategic fit is expanded to include all functions in a firm u Goal is to maximize company profit u Figure 2.11

© 2004 Prentice-Hall, Inc Strategic Scope: Intracompany Interfunctional Scope SuppliersManufacturerDistributorRetailerCustomer Competitive Strategy Product Dev. Strategy Supply Chain Strategy Marketing Strategy

© 2004 Prentice-Hall, Inc Intercompany Interfunctional Scope u The only positive cash flow for the supply chain occurs when the customer pays for the product – all other cash flows are resettling of accounts within the chain and add to total supply chain cost u Supply chain surplus –Difference between what the customer pays and total supply chain cost –Total profit to be shared among all members of the supply chain

© 2004 Prentice-Hall, Inc Intercompany Interfunctional Scope u Increasing supply chain surplus increases the amount to be shared u All stages coordinate strategy across all functions to ensure that they best meet the customer’s needs and maximize supply chain surplus u Also provides more speed by managing the interfaces between supply chain stages u Each company must evaluate its actions in the context of the entire supply chain u Figure 2.12

© 2004 Prentice-Hall, Inc Strategic Scope: Intercompany Interfunctional Scope SuppliersManufacturerDistributorRetailerCustomer Competitive Strategy Product Dev. Strategy Supply Chain Strategy Marketing Strategy

© 2004 Prentice-Hall, Inc Flexible Intercompany Interfunctional Scope u Ability to achieve strategic fit when partnering with stages that change over time in the supply chain u Customer needs and members of the supply chain change over time u A firm may have to partner with many different firms over time

© 2004 Prentice-Hall, Inc. Challenges u Increasing product variety and shrinking life cycles –Greater product variety and shorter life cycles increase uncertainty while reducing the window of opportunity within which the supply chain can achieve fit u Globalization and increasing uncertainty –Significant fluctuations in exchange rates, global demand, and the price of crude oil

© 2004 Prentice-Hall, Inc. Challenges u Fragmentation of supply chain ownership –Firms are less vertically integrated –Take advantage of supplier and customer competencies they did not have –New ownership structure makes aligning and managing the supply chain more difficult –Aligning all members of a supply chain has become critical to achieving supply chain fit

© 2004 Prentice-Hall, Inc. Challenges u Changing technology and business environment –Customer needs and technology change may force a firm to rethink their supply chain strategy u The environment and sustainability –Growing in relevance and must be accounted for when designing supply chain strategy –Opportunities may require coordination across different members of the supply chain