Supply Chain Performance:

Achieving Strategic Fit

9/10/2023 1
 The Value Chain: Linking Supply
Chain and Business Strategy
Business Strategy

New Product Marketing

Strategy Strategy
Supply Chain Strategy

F UNCTIONAL STRATIGIES
New Marketing
Product and Operations Distribution Service
Development Sales

Finance, Accounting, Information Technology, Human Resources

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 Competitive and Supply
Chain Strategies
 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
 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
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 Achieving Strategic Fit
 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
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 How is Strategic Fit Achieved?

 Step 1: Understanding the customer and supply

chain uncertainty
 Step 2: Understanding the supply chain Capabilities
 Step 3: Achieving strategic fit

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Step 1: Understanding the Customer
and Supply Chain Uncertainty
 Understanding the Customer
 Lot size
 Response time

 Service level Demand

 Product variety Uncertainty
 Price

 Innovation

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 Demand Uncertainty
Customer Need Causes Demand Uncertainty to ……..

Range of Quantity required Increases. Larger Demand . Larger Variance

increases
Lead Time Decreases Increases. Less time to react to orders

Variety of products Increases. Demand per product becomes more

required increases disaggregate
Number of channels Increases. Total customer demand is disaggregated
through which product may over more channels
be acquired increases
Rate of innovation Increases. New products tend to have more
increases uncertain demand
Required service level Increases. Firm has to handle unusual surges in
increases demand
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 Correlation Between Demand
Uncertainty and Other Attributes
Attribute Low Demand High demand
Uncertainty Uncertainty
Product margin Low High

Avg. forecast 10% 40%-100%

error
Avg. stockout 1%-2% 10%-40%
rate
Avg. forced 0% 10%-25%
season-end
markdown
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 Supply uncertainty by supply source
capability
Supplier source capability Causes supply uncertainty
to…..
Frequent Breakdowns Increase
Unpredictable & low yields Increase
Poor Quality Increase
Limited supply capability Increase
Inflexible supply capability Increase
Evolving production process Increase

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Step 1: Understanding the Customer
and Supply Chain Uncertainty
 Demand uncertainty also related to customer
needs and product attributes
 First step to strategic fit is to understand
customers by mapping their demand on the
implied uncertainty spectrum
Predictable supply & uncertain
demand or uncertain supply &
pred. demand or somewhat Highly uncertain
Predictable supply & demand uncert. Supply & demand Supply & demand

Salt at a market An existing Automobile model A new communication

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 Step 2: Understanding the
Supply Chain Capabilities
 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

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 Step 2: Understanding the
Supply Chain Capabilities
 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 lower efficiency
 cost-responsiveness efficient frontier
 supply chain responsiveness spectrum
 Second step to achieving strategic fit is to map
the supply chain on the responsiveness spectrum
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Understanding the Supply Chain: Cost-
Responsiveness Efficient Frontier
Responsiveness

High

A It is lowest possible cost for given level

of responsiveness . Not every firm can
operate on it

Low
Cost
High Low
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 Step 3: Achieving Strategic Fit
 Step is to ensure that what the supply chain does
well is consistent with target customer’s needs
 Fig. : Uncertainty/Responsiveness map &
Zone of strategic fit
 Examples: Dell, 7-11

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 Responsiveness Spectrum

Highly Somewhat Somewhat Highly

efficient efficient responsive responsive

Integrated Hanes Most

Dell-
steel mill- Apparel- automotive
•customized
•Less variety •Make to stock Production-
•Advanced Prod. •Prod. Lead time •Large variety
Schedule Is high •responsive

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 Dell case
 Customized PC’s in several days
 High innovation & rapid delivery so high
demand uncertainty
 Supply uncertainty for new products as well
 Needs responsive supply chain to match
competitive strategy

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 Achieving Strategic Fit Shown on the
Uncertainty/Responsiveness Map
Responsive
supply chain

Responsiveness
spectrum

Efficient
supply chain

Certain Demand Uncertain

demand uncertainty demand
spectrum
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 Step 3: Achieving Strategic Fit
 All functions in the value chain must support the competitive
strategy to achieve strategic fit
 Two extremes: Efficient supply chains (steel mills) and
responsive supply chains (Dell)
 Goal is to target high responsiveness for SC’s facing high
demand uncertainty, and efficiency for SC’s with low demand
uncertainty
 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
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 Comparison of Efficient and
Responsive Supply Chains
Efficient Responsive
Primary goal Lowest cost Quick response
Product design strategy Min product cost Modularity to allow
postponement
Pricing strategy Lower margins Higher margins
Mfg strategy High utilization Capacity flexibility
Inventory strategy Minimize inventory Buffer inventory
Lead time strategy Reduce but not at expense Aggressively reduce even
of greater cost if costs are significant
Supplier selection Cost and low quality Speed, flexibility, quality
strategy
Transportation strategy Greater reliance on low Greater reliance on
cost modes responsive (fast) modes
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 Tailoring SC for handling Demand
Uncertainty
Low Implied uncertainty absorbed α high efficiency

Can be located in low cost countries

Supplier Manufacturer Retailer IKEA- Swedish

Extent of demand Uncertainty for the Supply Chain

Supplier Manufacturer Retailer England Inc.

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 Other Issues Affecting Strategic
Fit
 Multiple products and customer segments
 Product life cycle

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 Multiple Products and
Customer Segments
 Firms sell different products to different
customer segments (with different demand
uncertainty)
 The supply chain has to be able to balance
efficiency and responsiveness given its portfolio
of products and customer segments
 Two approaches:
 Different supply chains
 Tailor supply chain to best meet the needs of each
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 Product Life Cycle
 The demand characteristics of a product and the
needs of a customer segment change as a
product goes through its life cycle
 Supply chain strategy must evolve throughout
the life cycle
 Early: uncertain demand, high margins (time is
important), product availability is most
important, cost is secondary
 Late: predictable demand, lower margins, price is
important
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 Product Life Cycle
 Examples: pharmaceutical firms, Intel
 As the product goes through the life cycle, the
supply chain changes from one emphasizing
responsiveness to one emphasizing efficiency

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Summary of Learning Objectives
 Types of functional strategies
 Importance of fit between Competitive strategy
& SC strategy
 Steps in achieving strategic fit

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