UNIT 7.

DEVELOPING
STRATEGY
 Developing Logistics/Supply Chain Strategy

The current method that most companies choose for improving supply chain
performance is to develop logistics and supply chain strategy as well as
implement sophisticated advanced planning systems, operations management
software and real time inventory management processes

Supply chain strategy extends to a much higher level than that of a concern with
improved inventory management practices and clearly reduced cost structure,
which relate to the physical flow of material. The supply chain strategy will, if
properly designed and managed:
 Improve customer service.
 Achieve the necessary balance between costs and service.
 Give the corporation a competitive advantage

There are three basic requirements that need to be met for effective development
of supply chain and logistics strategy is discussed below:
1. Understanding the Customer,
2. Assessing Supply Chain Uncertainty (Implied Demand Uncertainty), and
3. Understanding the Supply Chain Capabilities.
 Understanding the Customer
In general, customer demand from different
segments may vary along several attributes as
follows:
 The quantity of the product needed.
 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 design and innovation in the product.
 Implied Demand Uncertainty
Implied demand uncertainty is the resulting uncertainty for only the
portion of the demand that the supply chain must handle and the
attributes the customer desires.
Raising the service level means higher implied demand uncertainty
even though the product's underlying demand uncertainty does not
change. Both the product demand uncertainty and various customer
needs that the supply chain tries to fill affect implied demand
uncertainty.
 Understanding the Supply Chain Capabilities

Supply chain responsiveness is those abilities of a

supply chain necessary to meet the demand and
supply requirements of the supply chain. It
includes a supply chain's ability to:
 cater to wide demand fluctuations in the
market;
 deliver with short lead times;
 handle a large variety of products;

 provide a very high service level; and

 handle supply uncertainty promptly.

Responding to a wider range of quantities demanded, the supply
chain capacity must be increased, this in turn increases costs.
Therefore, increased responsiveness means additional costs and,
therefore, lowers efficiency. There is this trade-off between
responsiveness and efficiency that determines the design of the
supply chain. The efficient frontier represents the benchmark for cost-
responsiveness performance. A firm that is not on the efficient
frontier can improve both its responsiveness and its cost performance
by moving towards the efficient frontier. However, when a firm
reaches the efficient frontier, it can then only improve its
responsiveness by increasing cost and becoming less efficient.
In the competitive environment, firms on the efficient
frontier continuously improve their processes and change
technology to shift the efficient frontier itself. A key
strategic choice for any supply chain is the level of
responsiveness it seeks to provide. These parameters are
the basic blocks for the design of the supply chain. Based
on these, supply strategies are integrated into the design
of the supply chain.
 Developing Corporate Strategy
Corporate strategy is primarily about the choice of direction for the corporation as a
whole. The basic purpose of a corporate strategy is to add value to the individual
businesses in it. A corporate strategy involves decisions relating to the choice of
businesses, allocation of resources among different businesses, transferring skills and
capabilities from one set of businesses to others. The development of a corporate strategy
vis-a-vis a business-level strategy is summarized below:
The main aspects in developing corporate strategy are:
1. Deciding what the purpose of the organization is and what are the strategies to
achieve this.
2. At the general corporate level, the development of corporate strategy comprises of
decision related to following aspects:
(i) What business are we in and what business should we be in?
(ii) What are the basic directions for the future?
(iii) What are the cultural consideration and leadership style to be followed?
(iv) What is the organization attitude to strategic change? What should it be?
3. At the individual business level, the development of corporate strategy comprises of
decisions related to following issues:
(i) How do we compete successfully? What is our Sustainable competitive advantage?
(ii) How can we innovate?
(iii) Who are our customers?
(iv) What value do we add? Where? Why? How?
 Developing Logistics and Supply Chain Planning
• Detailed forecasts for individual items are generally short-term forecasting. Such
forecasts are used to plan the short-run decisions which are used for inventory
control, order sizing, or transport scheduling, etc.
• Medium-term forecasts are used to plan for capacity, location and layout over a
much longer time span.
• Long-term forecasts are used for strategic decision-making.

Logistics and supply chain planning tries to answer the questions raised by these
concerns. Some such broad basic questions are the following:
 How to determine which new products or services to introduce or discontinue;
which markets to enter or exit; and which products to promote?
 What sales plans to make, since sales quotas are generally based on estimates of

future sales?
 How to absorb the fluctuations in demand that will occur over the next 6 to 18
months; how to make production, procurement, and logistical plans?
 What should be our financial plans; how can demand fluctuations be absorbed
through inventory, workforce, work hours, suppliers’ activity, etc. and what is their
impact on earnings expectations?
 Will the organization lose orders if it does not meet all demands? What policy
should the firm adopt?
 Levels of Planning
Long-range Planning (LRP) /Strategic Planning

Long-range planning covers a relatively long period of time (anything over a five-year
period), and affects many departments/divisions of the organization. LRP is the result of
a series of interrelated steps:

1. The first basic step is the estimation of the international, national and local situation.
The possible future changes that might take place, in areas external to an organization
are examined.
2. The second step of LRP is defining the goals to be pursued by the organization and the
philosophy to be adopted.
3. The third step in LRP answers the simple question: where are we now? For this, an
objective assessment of the degree of success in accomplishing goals, on a day to day
basis, is made.
4. In the fourth step, an attempt is made to find out the strong or weak spots in the
company's programmes till date in the light of additional information on sales, selling
expenses, production targets, capital inflow, etc. The deficiencies are rectified promptly.
5. Now, a full blown programme of longer range planning is developed and approval is
sought for its adoption.
6. The last step is concerned with placing LRP into work, to reduce ambiguity and
achieve some measure of specificity. LRP is divided into action plans, that is,
intermediate and short-term plans for the sake of convenience and easy implementation.
 Short-range Planning or Operational Planning
Short-range planning covers a period of one to twelve months, depending on the nature of
business and the traditions prevailing in the industry. Short-range plans are otherwise
called operational plans.

What may appear to be long-range planning, in the case of one company may turn out to
be short-range planning in the cases of other companies. The major planning areas are:
1. Customers service
2. Demand forecasting
3. Distribution communication
4. Inventory control
5. Material handling
6. Order processing
7. Part and service support
8. Plant and warehouse side selection
9. Procurement sources
10. Packaging issues
11. Return goods handling
12. Salvage and scrap disposal
13. Traffic and transportation
14. Warehousing and storage.
Conceptualizing the Logistics and Supply Chain Planning Problem

Supply chain and logistics planning is used to optimize the operations of

the organization. A number of options are available to manage supply
and logistics. When the organization has excess capacity, it tries to
manage supply and when it has less capacity, it tries to manage demand.
Once the plan has been determined, there are basically three strategies in
planning to manage the problem related to supply chain and logistics:
• Chase Strategy
• Level Strategy
• Mixed Strategy
Conceptualizing the logistics and supply chain planning problem
involves the following aspects:
• Forecasting,
• Modeling, and
• Characterization.
 Guidelines of Strategy Formulation
The following are the guidelines of effective
strategy formulation:
1. Understanding the “big picture”

2. Integration of Functional Areas

3. Resource Focus

4. Externally Tuned

5. Wider Application

6. Enhancement of Analytical Skills