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Customer Service & Cost Trade-Offs

• Firm must ensure smooth fit between its
business strategy and SC strategy
Trade-Offs • Business Strategy include: deciding the target
market and offering the customer service
• SC Strategy include: the issue of cost that firm
has to incur to provide the targeted level of
customer services.
• Firms identify external market opportunities
and develop internal supply chain capabilities

Supply chain trade-offs Efficient Frontier

• Firm wants to provide high level of customer • That calls for a balance between these two.
services i.e. varieties, short delivery time • Finding a combination where both aspects can
…and at the same time wants to reduce cost. be managed and that is called efficient
• But to improve performance on customer frontier. (Ex: Pizza company)
service front , it must accept increase in costs. HIgh
• Efficient Frontier which defines the nature of Cost of
trade-offs between supply chain costs and Service

customer service.

Low Service HIgh

Level

Efficient Frontier 1) Order Delivery Lead Time

• If a firm is on efficient frontier , it represent • It is the time taken by the supply chain to
the best attainable compromise between the complete all the activities from order to
two dimensions at any given point of time. delivery.
• Customer services include various other • What is Customer Expectation for lead time..?
dimension also: • FMCG..Durables…Home delivery…
– Order delivery Lead Time
• Promised delivery lead time has tremendous
– Responsiveness implications on supply chain design and
– Delivery Reliability operations. Ex: Fabmart-delivery within 48
– Product Variety hours

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Interaction between SC Lead Time &

Delivery Lead Time
Customer Order
• Supply chain lead time is the aggregate of all
Order Penetration Point
four activities.
Order Delivery Lead Time
• Order delivery lead item is after the order
Make
penetration point.
Source Assembly Delivery
Components • Unfortunately for many firms, supply chain
lead time and order delivery lead times
Supply Chain Lead Time
usually do not match.

Trade-Off
• Ideal Situation: A firm wants to work with the • After the order penetration point, all activities do
a delivery lead time higher than the supply not face any uncertainties because they are
against the specific customer order. (also called
chain lead time. (because order delivery lead
decoupling point)
time it is not based on forecast)
• All the activities prior to the customer order must
• An order delivery lead time is dictated by the be carried out against the forecast and not on
competitive offerings by the firm and based actual orders.
on customer needs • Firm has to keep decoupling stock ready before
the order penetration point and manage both
side i.e. before & after.

Types of SC on basis of Order

Make to Stock (MTS)
Penetration Point
Customer Order
• There are essentially three types of supply
chain characterized by the customer order
penetration point:
• Make to Stock (MTS)
Make
Source Assembly Delivery
• Make to Order (MTO) Components

• Configure to Order (CTO/ATO/BTO)

When customer expect their order to be fulfilled
immediately : Retail Outlets

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Make to Order (MTO) Configure to Order

Customer Order
Customer Order

Make Make
Source Assembly Delivery Source Assembly Delivery
Components Components

If customer gives enough time to the firm to assemble the product

If the customer gives enough time to manufacturer to carry out
before delivery: : Ex. Pizza
complete set of operations : Equipment Manufacturer

Push-Pull Boundary of Supply Chain Push-Pull Boundary of Supply Chain

Push-Pull Boundary • Supply chain process can be divided into two
categories based on their position in the supply
Push chain with respect to the customer order point.
Pull
• All the process carried out before the customer
Make order are managed through push approach.
Source Assembly Delivery
Components
• All the process carried out after the customer
order are managed through pull approach.
• The interface between the push based processes
and pull based strategy is called push-pull
boundary.

Push-Pull Boundary of Supply Chain Make to Stock (MTS)

Customer Order
• Push Approach: executed based on forecast,
Push Pull
no known customer order in the process. Boundary

• Pull Approach: Executed against specific order,

no uncertainties.
Make
Source Assembly Delivery
• For MTS MTO & CTO , push pull approach will Components

be different:
Managed through Push
Approach

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Make to Order (MTO) Configure to Order

Customer Order
Push-Pull Boundary
Push Pull
Boundary Customer Order

Push
Pull

Make Make
Source Assembly Delivery Source Assembly Delivery
Components Components

Managed through Pull

Approach

2) Supply Chain Responsiveness Supply Chain Responsiveness

• Responsiveness captures the firm’s ability to • Functional products are those which satisfies the
basic needs of a customer
handle the uncertainty of market demand.
• Low variety..stable and predictable demand..
• Supply chain is also affected by the Long life cycles.. Low profit margins..
Uncertainty of demand for the product. • Ex: Grocery
• Based on Uncertainty of demand product can • Innovative products: satisfy a broad range of
customer’s wants such as fashion & technology
be classified in to products
– Functional • High variety..unstable unpredictable demand..
– Innovative High profit margins.. Short life cycle.. Frequent
stock outs.. Markdowns ..

Main Function of Supply Chain

Differences in Demand
& Cost
Aspects of Demand Functional (Predictable Innovative (Un-p) Main Function of Supply Chain
Demand) • Physical Functions : transformation of material into end
PLC More than 2 years 3 Months to One year product. Include production cost, transportation cost &
inventory storage.
Contribution Margin 5-20% 20-60 %
• Market Mediation Function : ensures that variety of
Product Variety Low (10-20 variants) High (thousands of products reaching to market matches the needs of the
variants) customers. cost incurred due to demand supply
Likely forecast error 5-20% 40-100%
mismatch.
– If supply is more than demand: product has to be marked
Average Stock-out rate 1-2% 10-40% down & sold at loss.
End of season 0% 10-30% – If supply is less than demand: lost sales opportunities &
markdown dissatisfied customer

Source: HBR: What is right Supply Chain for your Product.

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Managing supply chain design with

Trade Off
nature of products
• Functional product needs efficiency in supply Functional Product Innovative Product

chain because of low stock out rate low

margin. Efficient Supply Chain Match Mismatch

• Whereas in case of innovative products, high

margin & high variety call for responsive Responsive Supply Chain Mismatch Match

supply chain.
• Thus product characteristics & supply chain Sources: HBR
need to be matched.

3) Delivery Reliability
• It essentially capture the degree to which a
firm is able to service its customer within the
promised delivery time.
• In case of MTS model :delivery reliability is -
product availability.
• In case of MTO or CTO model: delivery
reliability is -the promised delivery time.

Trade-off inventory cost and stock out Trade-off inventory cost and stock out
cost cost
• Given the nature of demand and supply • MTO: will have to maintain slack capacity in
uncertainty… the entire system. supplier is chosen on basis
• Firms have to trade-off inventory cost and stock of performance and delivery reliability is one
out cost for optimum service level.
of its parameter.
• MTS: firm has to keep higher inventory to ensure
product availability and to offer higher level of
services.
• CTO: firm has to hold higher inventory before the
order penetration point and after that slack
capacity in the system

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4) Product Variety Product variety trade-off

• The quantum of variety offered by a firm is • Firm has to manage trade-offs with other
also an important dimension of customer dimensions of customer services like slack
service. capacity..order lead time.
• High product varieties: opportunities for • Higher the product variety higher would be the
customer to find his/ her actual lead time. For example restaurants offering
requirements….Allowing customers to design variety of products as compare to less variety of
their own products. products.
• Higher variety leads to greater complexities • To bring trade-offs companies are working on the
resulting in higher supply chain cost. idea of platform products or modular design.