Chapter 2

Supply Chain Performance: Achieving Strategic Fit and Scope

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 Outline

• Competitive and supply chain strategies

• Why Strategic fit is critical to company’s overall success
• Achieving strategic fit between its supply chain strategy and
its competitive strategy
• Importance of expanding the scope of strategic fit across the
supply chain
• The major challenges that must be overcome to manage a
supply chain successfully

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 What is Supply Chain Management?

• Managing supply chain flows and assets, to maximize

supply chain surplus

• What is supply chain surplus?

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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
• The competitive strategy is defined based on how the customer prioritizes product
cost, delivery time, variety, and quality
• For example, A McMaster-Carr customer places greater emphasis on product
variety and response time than on cost. A Wal-Mart customer, in contrast, places
greater emphasis on cost.
• Thus , a firm’s competitive strategy is defined based on how the customer
prioritizes product cost, delivery, time, variety, and quality
• Competitive strategy targets one or more customer segments and aims to provide
products and services that satisfy these customers’ needs.

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 The Value Chain: Linking Supply
Chain and Business Strategy
Finance, Accounting, Information Technology, Human Resources

New Marketing
Product and Operations Distribution Service
Development Sales

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 Competitive and Supply Chain
Strategies
• Product development strategy: specifies the portfolio of new products that the
company will try to develop. It also dictates whether the development effort will be
made internally or outsourced.
• 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
• Supply chain strategy specifies what the operations, distribution and service
functions, whether performed in-house or outsourced, should do particularly
well

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Competitive and Supply Chain Strategies

• Supply chain strategy includes a specifications of the broad structure of the supply chain
and what many traditionally call ‘supplier strategy’, ‘operations strategy’, and ‘Logistics
strategy’.
• For example, Dell’s initial decision to sell direct, its 2007 decision to start selling PCs
through resellers define the broad structure of its supply chains and are all part of its supply
chain strategies
• Supply chain also includes design decisions regarding inventory, transportation,
transportation, operating facilities, and information flows
• For example, Amazon’s decision to build warehouses to stock some products to continue
using distributors as a source of other products are part of its supply chain strategy
• Consistency and support between supply chain strategy, competitive strategy, and other
functional strategies is important

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 Achieving Strategic Fit

• Introduction
• How is strategic fit achieved?
• Other issues affecting strategic fit

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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
• Strategic fit requires that both competitive and supply chain strategies of a company
have aligned 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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 Achieving Strategic Fit

For a company to achieve strategic fit, it must accomplish the following:

• The competitive strategy and all functional strategies must fit together to
form 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 to execute these strategies successfully
• The design of the overall supply chain and the role of each stage must be
aligned to support supply chain strategy.

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 How is Strategic Fit Achieved?

• Step 1: Understanding the customer and supply chain uncertainty

The supply chain uncertainty helps the company identify the extent of the
unpredictability of demand, disruption, delay that the supply chain must be
prepared for
• Step 2: Understanding the supply chain
A company must understand what its supply chain is designed to do well
• Step 3: Achieving strategic fit
If a mismatch exists, the company will either need to restructure the supply
chain to support the competitive strategy or alter its competitive strategy

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Step 1: Understanding the Customer and Supply
Chain Uncertainty

To understand the customer, a company must identify the

needs of the customer segment being served.
Example: Seven-Eleven Japan, Sam’s Club
In the case of Seven-Eleven, the customers are in a hurry
and want convenience
In the case of Sam’s club, the want a low price and are
willing to spend time getting it
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 Step 1: Understanding the Customer and
Supply Chain Uncertainty

Customer demand from different segments varies along several attributes as follows:

• Quantity of product needed in each lot: whether order is small or large

• Response time customers will tolerate: The tolerable/allowable response time short or long
• Variety of products needed:
• Service level required
• Price of the product: whether sensitive to price or not
• Desired rate of innovation in the product
There are many attributes along which customer demand varies, our goal is to identify one key measure
for combining all of these attributes. The single measure then helps define what the supply chain should
do particularly well

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Step 1: Understanding the Customer and Supply
Chain Uncertainty

• Demand uncertainty: uncertainty of customer demand

for a product
• Implied demand uncertainty: resulting uncertainty for the
supply chain given the portion of the demand the supply
chain must handle and attributes the customer desires

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Step 1: Understanding the Customer and
Supply Chain Uncertainty

• Implied demand uncertainty also related to customer needs

and product attributes
• Table 2.1
• Figure 2.2
• Table 2.2
• First step to strategic fit is to understand customers by
mapping their demand on the implied uncertainty spectrum
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 Achieving Strategic Fit

• Understanding the Customer Implied

• Lot size Demand
• Response time
Uncertainty
• Service level
• Product variety
• Price
• Innovation

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Impact of Customer Needs on Implied Demand
Uncertainty (Table 2.1)
Customer Need Causes implied demand
uncertainty to increase because …
Range of quantity increases Wider range of quantity implies
greater variance in demand
Lead time decreases Less time to react to orders

Variety of products required Demand per product becomes more

increases
Number of channels increases
Rate of innovation increases
Required service level increases
disaggregated
Total customer demand is now
disaggregated over more channels
New products tend to have more
uncertain demand
Firm now has to handle unusual
surges in demand
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 Levels of Implied Demand
Uncertainty
Predictable Predictable supply and uncertain Highly uncertain
supply and demand or uncertain supply and supply and demand
demand predictable demand or somewhat
uncertain supply and demand

Salt at a An existing A new

supermarket automobile communication
model device

Figure 2.2: The Implied Uncertainty (Demand and Supply)

Spectrum

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Correlation Between Implied Demand Uncertainty
and Other Attributes (Table 2.2)

Attribute Low Implied High Implied

Uncertainty Uncertainty
Product margin Low High

Avg. forecast error 10% 40%-100%

Avg. stockout rate 1%-2% 10%-40%

Avg. forced season- 0% 10%-25%

end markdown

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Correlation Between Implied Demand Uncertainty
and Other Attributes

• Products with uncertain demand are often less mature and have
less direct competition. As a result, margins tend to be high
• Forecasting is more accurate when demand has less uncertainty
• Increased implied demand uncertainty leads to increased difficulty
in matching supply with demand, and thus leads to both higher
oversupply and stockout rate
• Marks down are high for products with greater implied uncertainty
because oversupply often results
Example: Salt vs Mobile phone

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Impact of Supply Source Capability on Supply
Uncertainty

Supply source capability Causes supply uncertainty to

• Frequent breakdowns • Increase

• Unpredictable and low yields • Increase
• Poor quality • Increase
• Limited supply capacity • Increase
• Inflexible supply capacity • Increase
• Evolving production process • Increase

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 Step 2: Understanding the
Supply Chain
• How does the firm best meet demand?
• Creating strategic fit is all about creating a supply chain strategy that best
meets the demand a company has targeted given the uncertainty it faces
• Supply chain responsiveness includes a supply chain’s 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
The more of these abilities a supply chain has, the more responsive it is

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 Step 2: Understanding the
Supply Chain
• There is a cost to achieving responsiveness
• Supply chain efficiency: It is the inverse of the cost of making and delivering the
product to the customer
• Increasing responsiveness results in higher costs that lower efficiency
• For every strategic choice to increase responsiveness, there are additional costs
that lower efficiency
• Figure 2.3: cost-responsiveness efficient frontier
• Figure 2.4: 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

Low
Cost 2-
High Low 24
Cost-Responsiveness Efficient Frontier

• A firm that is not on the efficient frontier can improve both its
responsiveness and its cost performance by moving toward the efficient
frontier
• In contrast, the firm on the efficient frontier can improve its responsiveness
only by increasing cost and becoming less efficient
• Such a firm must then make a trade-off between efficiency and
responsiveness
• Given the trade-off between cost and responsiveness, a key strategic choice
for any supply chain is the level of responsiveness it seeks to provide
• Example, Seven-Eleven Japan, W.W. Grainger, Sam’s Club

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 Responsiveness Spectrum
(Figure 2.4)
Highly Somewhat Somewhat Highly
efficient efficient responsive responsive

Integrated Hanes Most Seven-Eleven Japan

steel mill apparel automotive
Production production Changing merchandise
scheduled A traditional mix by location and
weeks/months make-to-stock Delivering a large time of day
in advance with manufacturer variety of products
little variety or with production in a couple of
flexibility lead time of weeks
several weeks

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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
• After mapping the level of implied uncertainty and understanding the supply chain
position on the responsiveness spectrum, the final step is to ensure that the degree of
supply chain responsiveness is consistent with the implied uncertainty
The goal is to target -
• High responsiveness for a supply chain facing high implied uncertainty
• High efficiency for a supply chain facing low implied uncertainty
Example, McMaster-Carr
• Fig. 2.5: Zone of strategic fit
• Examples: Dell, Barilla

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 Achieving Strategic Fit Shown on the
Uncertainty/Responsiveness Map (Fig. 2.5)
Responsive
supply chain

Responsiveness e of it
n F
spectrum Zo egic
t
t ra
S

Efficient
supply chain

Certain Implied Uncertain

demand uncertainty demand 2-

spectrum 28
 Step 3: Achieving Strategic Fit

• All functions in the value chain must support the competitive strategy to achieve strategic fit
• For a high level of performance , companies should move their competitive strategy ( and
resulting implied uncertainty) and supply chain strategy (and resulting responsiveness)
toward the zone of strategic fit
• Desired level of responsiveness required across the supply chain may be attained by
assigning different levels of responsiveness and efficiency to each stage of the supply chain
Example, IKEA, England Inc.

• 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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IKEA Furniture

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Different Roles and Allocations of Implied Uncertainty for a
given level of Supply Chain Responsiveness

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 Comparison of Efficient and Responsive Supply
Chains (Table 2.4)
Efficient
Primary goal Lowest cost
Product design strategy Min product cost
Pricing strategy Lower margins
Mfg strategy High utilization
Inventory strategy Minimize inventory
Lead time strategy Reduce but not at expense
of greater cost
Supplier selection strategy Cost and low quality
Transportation strategy Greater reliance on low cost
modes
Responsive
Quick response
Modularity to allow
postponement
Higher margins
Capacity flexibility
Buffer inventory
Aggressively reduce even if
costs are significant
Speed, flexibility, quality
Greater reliance on
responsive (fast) modes
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 Tailoring the Supply Chain for
Strategic Fit

• Multiple products and customer segments

In such a scenario, a ‘one size fits all’ supply chain cannot
provide strategic fit, and a tailored supply chain strategy is
required
Example, Dell, Levi Strauss
• Product life cycle
• Competitive changes over time
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 Tailoring the Supply Chain for Strategic Fit

• Firms sell different products to different customer segments (with different implied
demand uncertainty)
• The supply chain has to be able to balance efficiency and responsiveness given its
portfolio of products and customer segments
• By tailoring its supply chain, a company can provide responsiveness to fast-growing
products, customer segments, and channels while maintaining low cost for mature,
stable products, and customer segments
• Tailoring the supply chain requires sharing some links in the supply chain with some
products, while having separate operations for the other links
Example, Transportation mode, manufacturing plant, plant location
• The level of responsiveness is tailored to each product, channel, or customer segment

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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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 Competitive Changes Over Time

• Competitive pressures can change over time

• More competitors may result in an increased emphasis on
variety at a reasonable price
• The Internet makes it easier to offer a wide variety of
products
• The supply chain must change to meet these changing
competitive conditions
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 Expanding Strategic Scope
• Scope of strategic fit
• The functions and stages within a supply chain that devise an integrated strategy
with an aligned objective
• One extreme: each function at each stage develops its own strategy
• Other extreme: all functional areas across all stages devise a strategy jointly
• Five categories:
• Intraoperation scope: The minimize local cost view
Conflicting objective, for example: Shipping full truckloads without any regard for
the resulting impact on inventories or responsiveness
• Intrafunctional scope: The minimize functional cost view
Conflicting objective, for example, marketing and sales focusing on revenue
generation, and manufacturing and distribution focusing on cost reduction

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 Expanding Strategic Scope

• Interfunctional Scope: The maximize company profit view

Conflicting objective, for example, both manufacturer and retailer might have
disagreement on who should hold more inventories
• Intercompany scope: The maximize supply chain surplus view
Different stages in a supply chain work together, share information etc. to increase the
supply chain surplus
• Agile Intercompany scope
It refers to a firm’s ability to achieve strategic fit when partnering with supply chain stages that
change overtime.
For example, As customer needs vary over time, firms must have ability to become part of new
supply chains while ensuring strategic fit

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Different Scopes of Strategic Fit
Across a Supply Chain
Suppliers Manufacturer Distributor Retailer Customer

Competitive
Strategy
Product Intercompany
Development Interfunctional Intracompany
Strategy Intrafunctional
at Distributor
Supply Chain
Intracompany
Strategy Intracompany
Intraoperation
Interfunctional
at Distributor
Marketing at Distributor
Strategy

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 Challenges to Achieving & Maintaining Strategic Fit

• Increasing Product Variety and Shrinking Life Cycles

• Globalization and Increasing Uncertainty
• Fragmentation of Supply Chain Ownership
• Changing Technology and Business Environment
• The Environment and Sustainability

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 Summary of Learning Objectives

• Why is achieving strategic fit critical to a company’s

overall success?
• How does a company achieve strategic fit between its
supply chain strategy and its competitive strategy?
• What is the importance of expanding the scope of
strategic fit across the supply chain?

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