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

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

3. © 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?

4. © 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!

5. © 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

6. © 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

7. © 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.

8. © 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

9. © 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

10. © 2004 Prentice-Hall, Inc. 2-10 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

11. © 2004 Prentice-Hall, Inc. 2-11 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

12. © 2004 Prentice-Hall, Inc. 2-12 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.

13. © 2004 Prentice-Hall, Inc. 2-13 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

14. © 2004 Prentice-Hall, Inc. 2-14 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

15. © 2004 Prentice-Hall, Inc. 2-15 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

16. © 2004 Prentice-Hall, Inc. 2-16 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

17. © 2004 Prentice-Hall, Inc. 2-17 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%

18. © 2004 Prentice-Hall, Inc. 2-18 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

19. © 2004 Prentice-Hall, Inc. 2-19 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

20. © 2004 Prentice-Hall, Inc. 2-20 Understanding the Supply Chain: Cost- Responsiveness Efficient Frontier HighLow High Responsiveness Cost

21. © 2004 Prentice-Hall, Inc. 2-21 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

22. © 2004 Prentice-Hall, Inc. 2-22 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

23. © 2004 Prentice-Hall, Inc. 2-23 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

24. © 2004 Prentice-Hall, Inc. 2-24 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

25. © 2004 Prentice-Hall, Inc. 2-25 Other Issues Affecting Strategic Fit u Multiple products and customer segments u Product life cycle u Competitive changes over time

26. © 2004 Prentice-Hall, Inc. 2-26 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.

27. © 2004 Prentice-Hall, Inc. 2-27 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

28. © 2004 Prentice-Hall, Inc. 2-28 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

29. © 2004 Prentice-Hall, Inc. 2-29 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

30. © 2004 Prentice-Hall, Inc. 2-30 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

31. © 2004 Prentice-Hall, Inc. 2-31 Strategic Scope Suppliers ManufacturerDistributorRetailerCustomer Competitive Strategy Product Dev. Strategy Supply Chain Strategy Marketing Strategy

32. © 2004 Prentice-Hall, Inc. 2-32 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

33. © 2004 Prentice-Hall, Inc. 2-33 Strategic Scope: Intracompany Intraoperation Scope SuppliersManufacturerDistributorRetailerCustomer Competitive Strategy Product Dev. Strategy Supply Chain Strategy Marketing Strategy

34. © 2004 Prentice-Hall, Inc. 2-34 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

35. © 2004 Prentice-Hall, Inc. 2-35 Strategic Scope: Intracompany Intrafunctional Scope SuppliersManufacturerDistributorRetailerCustomer Competitive Strategy Product Dev. Strategy Supply Chain Strategy Marketing Strategy

36. © 2004 Prentice-Hall, Inc. 2-36 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

37. © 2004 Prentice-Hall, Inc. 2-37 Strategic Scope: Intracompany Interfunctional Scope SuppliersManufacturerDistributorRetailerCustomer Competitive Strategy Product Dev. Strategy Supply Chain Strategy Marketing Strategy

38. © 2004 Prentice-Hall, Inc. 2-38 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

39. © 2004 Prentice-Hall, Inc. 2-39 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

40. © 2004 Prentice-Hall, Inc. 2-40 Strategic Scope: Intercompany Interfunctional Scope SuppliersManufacturerDistributorRetailerCustomer Competitive Strategy Product Dev. Strategy Supply Chain Strategy Marketing Strategy

41. © 2004 Prentice-Hall, Inc. 2-41 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

42. © 2004 Prentice-Hall, Inc. 2-42 Summary of Learning Objectives u Why is achieving strategic fit critical to a company’s overall success? u How does a company achieve strategic fit between its supply chain strategy and its competitive strategy? u What is the importance of expanding the scope of strategic fit across the supply chain?