ACHIEVING STRATEGIC FIT SUPPLY CHAIN DRIVERS AND OBSTACLES

SUPPLY CHAIN DECISIONS Direction and Extent of Vertical Integration Production/Procurement decisions Selection of Partners Nature of Relationships Facilities Location Inventory decisions Transportation decisions Communications Interface Design Decisions

Supply Chain Strategy The first step in devising an effective supply-chain strategy is to consider the nature of the demand for the products that a company supplies Functional products Staples that people buy in a wide range of retail stores and gas stations Have stable predictable demand and long life cycles Innovative products Demand is unpredictable Life cycle is short because imitators erode the competitive advantage

ROUTES TO VALUE CREATION Manufacturing Logistics Flexible Production Reduced Costs Distribution Management Speedy Movement to Market Increased Market Share After Sales Service Improved Customer Satisfaction Customer Loyalty

ACHIEVING STRATEGIC FIT Competitive strategy and all functional strategies must fit together to from a coordinated overall strategy. Each functional strategy must support other functional strategies and help a firm reach its competitive strategy goal. The different functions in a company must appropriately structure their processes and resources to be able too execute these strategies successfully.

METHODOLOGY FOR ACHIEVING STRATEGIC FIT Understanding the customer Understanding the supply chain Achieving strategic fit

UNDERSTANDING THE CUSTOMER The quality of product needed in each lot The response time that customers are willing to tolerate The variety of products needed The service level required The price of the product The desired rate of innovation in the product

DEMAND UNCERTAINTY Apparent Implied Impact on customer needs Implied uncertainty spectrum Correlation between implied demand uncertainty and other attributes

PRODUCT ATTRIBUTES AND DEMAND UNCERTAINTY High Low Demand uncertainty Purely Functional Products Demand more Certain Established Goods Demand variable within limits New Models of existing goods Demand unpredictable Entirely New Products Demand highly uncertain

CORRELATION -IMPLIED DEMAND UNCERTAINTY AND OTHER ATTRIBUTES Product Margin Ave Forecast Error Ave Stock out Rate Ave forced season end mark down LOW HIGH HIGH IDU LOW IDU

SUPPLY CHAIN RESPONSIVENESS 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

RESPONSIVENESS EFFICIENT FRONTIER HIGH RESPONSIVENESS EFFICIENT FRONTIER LOW HIGH LOW COST

UNCERTAINTY RESPONSIVENESS MAP SUPPLY CHAIN RESPONSIVENESS SPECTRUM EFFICIENT SUPPLY CHAINS ? IMPLIED UNCERTAINTY CERTAIN SPECTRUM UNCERTAIN DEMAND DEMAND

LOGISTICS STRATEGIC PLANNING A unified, comprehensive and integrated planning process to achieve competitive advantage through increased value and customer service, which results in superior customer satisfaction (where we want to be), by anticipating future demand for logistic services and manufacturing resources of the entire supply chain (how to get there). This planning is done within the context of corporate goals and plans. Strategic Planning for Logistics; Ohio State University

FINDING THE ZONE OF STRATEGIC FIT RESPONSIVE SUPPLY CHAIN RESPONSIVENESS SPECTRUM EFFICIENT SUPPLY CHAINS Zone of Strategic Fit IMPLIED UNCERTAINTY CERTAIN SPECTRUM UNCERTAIN DEMAND DEMAND

COMPARISON OF EFFICIENT AND RESPONSIVE SUPPLY CHAINS PRIMARY GOAL EFFICIENT SUPPLY CHAIN Supply demand at lowest cost RESPONSIVE SUPPLY CHAIN Respond quickly to demand

COMPARISON OF EFFICIENT AND RESPONSIVE SUPPLY CHAINS PRODUCT DESIGN STRATEGY EFFICIENT SUPPLY CHAIN Maximise performance at minimum product cost RESPONSIVE SUPPLY CHAIN Create modularity to allow postponement of product differentiation

COMPARISON OF EFFICIENT AND RESPONSIVE SUPPLY CHAINS PRICING STRATEGY EFFICIENT SUPPLY CHAIN Lower margins because price is a prime customer driver RESPONSIVE SUPPLY CHAIN Higher margins as price is not a prime customer driver

COMPARISON OF EFFICIENT AND RESPONSIVE SUPPLY CHAINS MANUFACTURING STRATEGY EFFICIENT SUPPLY CHAIN Lower costs through higher utilisation RESPONSIVE SUPPLY CHAIN Maintain capacity flexibility to meet unexpected demand

COMPARISON OF EFFICIENT AND RESPONSIVE SUPPLY CHAINS INVENTORY STRATEGY EFFICIENT SUPPLY CHAIN Minimise inventory to lower cost RESPONSIVE SUPPLY CHAIN Maintain buffer inventory to meet unexpected demand

COMPARISON OF EFFICIENT AND RESPONSIVE SUPPLY CHAINS LEAD TIME STRATEGY EFFICIENT SUPPLY CHAIN Reduce but not at the expense of cost RESPONSIVE SUPPLY CHAIN Aggressively reduce even if the costs are significant

COMPARISON OF EFFICIENT AND RESPONSIVE SUPPLY CHAINS SUPPLIER STRATEGY EFFICIENT SUPPLY CHAIN Select based on cost and quality RESPONSIVE SUPPLY CHAIN Select based on speed, flexibility and quality

COMPARISON OF EFFICIENT AND RESPONSIVE SUPPLY CHAINS TRANSPORTATION STRATEGY EFFICIENT SUPPLY CHAIN Greater reliance on low cost modes RESPONSIVE SUPPLY CHAIN Greater reliance on responsive modes

EXPANDING STRATEGIC SCOPE Intra- company and Intra-operation Scope The minimse local cost view Intra-company Intra-functional Scope The minimise functional cost view Intra-company Inter-functional Scope The maximise company profit view Inter-company Inter-functional view The maximise supply chain surplus view

Supply Chain The Supply Chain performs two distinct types of functions: 1) Physical function - Includes converting raw materials into parts, components, and eventually finished goods, transporting all of them from one point in the supply chain to the next - Physical costs include costs of production, transportation etc.

Supply Chain 2) Market mediation - Purpose is ensuring that the variety of products reaching the marketplace matches what consumers want to buy - Market mediation costs arise when supply exceeds demand

Supply Chain There are also 2 types of supply chains - Physically efficient process - Supplies predictable demand efficiently at the lowest possible cost - Generate high turns and minimise inventory throughout the chain - Market responsive process - Respond quickly to unpredictable demand in order to minimise stock outs, forced markdowns, and obsolete inventory - Deploys significant buffer stocks of parts or finished goods

Supply Chain Strategy To devise the ideal supply chain strategy, companies have to: - Determine if their products are functional or innovative - Decide if company’s supply chain is physically efficient or responsive to the market - Employ a matrix to formulate the ideal supply-chain strategy

Matching Supply Chain Design to Demand Marshall Fisher. HBR Mar-Apr 1997

Supply Chain Strategy Functional Products Innovative Products Efficient Supply Chain move match mismatch e.g. Campbell’s Soup move mismatch Responsive Supply Chain match However not very common withfunctional products e.g. National Bicycle

Outline Drivers of supply chain performance A framework for structuring drivers Inventory Transportation Facilities Information Obstacles to achieving fit

Drivers of Supply Chain Performance Inventory raw materials, WIP, finished goods within a supply chain inventory policies Transportation moving inventory from point to point in a supply chain combinations of transportation modes and routes

Drivers of Supply Chain Performance Facilities places where inventory is stored, assembled, or fabricated production sites and storage sites Information data and analysis regarding inventory, transportation, facilities throughout the supply chain potentially the biggest driver of supply chain performance

A Framework for Structuring Drivers Competitive Strategy Supply Chain Strategy Efficiency Responsiveness Supply chain structure Inventory Transportation Facilities Information Drivers

Inventory: Role in the Supply Chain Inventory in the supply chain exists because of a mismatch between supply and demand Major source of cost and huge influence on responsiveness Significant impact on material flow time in a supply chain Inventory and flow time are “synonymous” in a supply chain

Inventory: Role in Competitive Strategy If responsiveness is a strategic competitive priority, a firm can locate larger amounts of inventory closer to customers If cost is more important, inventory can be reduced to make the firm more efficient

Components of Inventory Decisions Cycle inventory Average amount of inventory used to satisfy demand between shipments Depends on lot size Safety inventory inventory held in case demand exceeds expectations costs of carrying too much inventory versus cost of losing sales

Components of Inventory Decisions Seasonal inventory inventory built up to counter predictable variability in demand cost of carrying additional inventory versus cost of flexible production Overall trade-off: Responsiveness versus efficiency more inventory: greater responsiveness but greater cost less inventory: lower cost but lower responsiveness

Inventory Control Systems As demand and lead times are variable, we can either order fixed quantities of stock at variable times or order variable quantities at fixed times

Two-bin replenishment system Imagine two equally sized bins (bays, pallets or similar) used for storage in the warehouse or at the workstation storage point. The ROL be thus be seen visually. With the first bin empty, a new full bin is "called" to arrive before the second bin is exhausted. The call is rotated. With proper rotation system is efficient (little paperwork). In a computerised enviroment the bins/pallets themselves can be bar coded and their movement/position and batch numbers of bin components can be traced.

Comparing Responsiveness as demand changes Re-order level approach - average stock levels stay more or less the same and are less responsive to changes in demand. There is a risk of stock outs with Unexpected rising demand but outstanding re-supply orders can be chased. Re-order cycle systems - rising demand can exhaust stocks with no outstanding orders in the pipeline.

Which System? Of the systems (annual demand, two-bin, re-order cycle, re-order level) none are universally versatile. Many organisations operate a hybrid. Choosing between fixed quantity or fixed time approaches depends on risking unexpected movement in demand against the costs of administering convenient, scheduled replenishment. The safety stock penalty of fixed re-order cycle methods worsens as stock usage value and demand variability rise. Generally fixed time systems suit stock with stable/predictable demand patterns and low usage values

Transportation: Role in the Supply Chain Moves the product between stages in the supply chain Large impact on responsiveness and efficiency Faster transportation allows greater responsiveness but lower efficiency Also affects inventory and facilities

Transportation: Role in the Competitive Strategy If responsiveness is a strategic competitive priority, then faster transportation modes can provide greater responsiveness to customers who are willing to pay for it Can also use slower transportation modes for customers whose priority is price (cost) Can also consider both inventory and transportation to find the right balance

Components of Transportation Decisions Mode of transportation: air, truck, rail, ship, pipeline, electronic transportation vary in cost, speed, size of shipment, flexibility Route and network selection route: path along which a product is shipped network: collection of locations and routes In-house or outsource Overall trade-off: Responsiveness versus efficiency

Facilities Role in the supply chain the “where” of the supply chain Role in the competitive strategy economies of scale from fewer facilities (efficiency priority) larger number of smaller facilities (responsiveness priority)

Components of Facilities Decisions Location centralization (efficiency) vs. decentralization (responsiveness) other factors to consider (e.g., proximity to customers) Capacity (flexibility versus efficiency) Overall trade-off: Responsiveness versus efficiency

Information: Role in the Supply Chain The connection between the various stages in the supply chain -- allows coordination between stages Crucial to daily operation of the each stage in a supply chain -- e.g., production scheduling, inventory levels

Flows in a Supply Chain Supply Chain Customer Information Product Funds Supply Chain

Information: Role in the Competitive Strategy Allows supply chain to become more efficient and more responsive at the same time reduces the need for a trade-off Information technology investments What information is most valuable?

Components of Information Decisions Coordination and information sharing Enabling technologies EDI Internet ERP systems Supply Chain Management software Overall trade-off: Responsiveness versus efficiency

Considerations for Supply Chain Drivers Efficiency Responsiveness Inventory Cost of holding Availability Transportation Consolidation Speed Facilities Consolidation/ Dedicated Proximity/ Flexibility Information What information is best suited for each objective