Achieving Strategic fit

Competitive and Supply Chain Strategies

 Competitive strategy defines the set of customer needs a firm

seeks to satisfy through its products and services

 Walmart – high availability, value for money (low price)

 XYZ Co selling MRO products offering more than 500,000

products , catlog and website – convenience, availability and
responsiveness.

 Blue Nile – online diamond retail, 90,000 stones – variety,

wait, cannot touch and feel
 Zales – retail stores – limited, personal touch, fast response
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

 All functional strategies must support one another and the

competitive strategy
The Value Chain

• Dell – initial decision to sell direct, 2007 decision to sell PCS

through resellers
• CISCO – contract manufacturers - sc strategy
• SC strategy – include design decision regd inventory,
transportation, operation facilities and information flows.
• Amazon – build own warehouses and use distributors of other
products .
• Toyota – decision to have production facilities in each of its
major markets
• Seven Eleven success because of excellent fir of functional
strategies
Achieving Strategic Fit
 What is a Strategic fit ?

Customer
Competitive Strategies priorities

Aligned Goals

Supply Chain Strategies Supply Chain

Capabilities
Achieving Strategic Fit
1. The competitive strategy and all functional strategies
must fit together to form a coordinated overall
strategy.

2. The different functions in a company must

appropriately structure their processes and resources
to be able to execute these strategies successfully.

3. The design of the overall supply chain and the role of

each stage must be aligned to support the supply
chain strategy.
Achieving Strategic Fit
 Co. 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

 Ex: Marketing – large variety of products quickly

Distribution – targeting lowest cost means of
transportation

 Ex: Retailer high level of variety – low level

inventory but select suppliers/carriers (low price)
Achieving Strategic Fit - DELL
 1993 – 2006
 Large variety, customized
products, reasonable price
 Focus on customization so SC
designed to be responsive
 Assembly facilities owned
designed for flexible factor
 Low inventory hence supplier/
carriers highly responsive
 Sony monitor merged by
carriers with PCs
Focus on Responsiveness
 Starting 2007
 Change in competitive strategy
 Selling PCs thru Walmart
 Limited variety
 Inventory of peripherals need
to be available
 Production changed to MTS
model
 Contract manufacturers –
Foxconn (low cost focus)
manufactured for DELL
Greater focus on low cost
How is Strategic Fit Achieved?
1. Understanding the customer and supply
chain uncertainty
The supply chain uncertainty helps co define the extent of
unpredictability of demand and supply that the supply chain must be
prepared for.

2. Understanding the supply chain capabilities

Many types of supply chain designed for certain tasks. Co
needs to understand what is supply chain can do best

3. Achieving strategic fit

Customer need MISMATCH with What SC does best, then
◦ Alter competitive strategy (can we????) OR
◦ Restructure the Supply Chain to support the
Competitive strategy
Step 1: Understanding the Customer and
Supply Chain Uncertainty

HURRY &
CONVENIENCE

Vs
WAIT & LOW PRICE
Step 1: Understanding the Customer and
Supply Chain Uncertainty
Emergency Regular

Quantity of product needed in each lot Small Large

Response time customers will tolerate Short Long

High premium Low price

Variety of products needed
for availability
Immediate Long lead
Service level required
time
Price of the product Less sensitive Highly
sensitive
Desired rate of innovation in the High end (new Regular
product designs Ex: Brand
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
 Ex: Firm catering to emergency orders face higher implied
demand uncertainty than firm supplying regular (opportunity
to fulfil due to long lead time)
 EX: Raise in level of service should meet higher percentage
of actual demand, forcing it to prepare for rare surges of
demand
 Customer Needs and
Implied Demand Uncertainty
Customer Need
Range of quantity required
increases
Lead time decreases
Variety of products required
increases
Number of channels through
which product may be
acquired increases
Rate of innovation increases
Causes Implied Demand Uncertainty to …
Increase because a wider range of the
quantity required implies greater variance in
demand
Increase because there is less time in which
to react to orders
Increase because demand per product
becomes less predictable
Increase because the total customer demand
per channel becomes less predictable
Increase because new products tend to have
more uncertain demand
Implied Uncertainty and Other Attributes

1. Products with uncertain demand are often less mature and

have less direct competition. As a result, margins tend to be
high.
2. Forecasting is more accurate when demand has less
uncertainty.
3. Increased implied demand uncertainty leads to increased
difficulty in matching supply with demand. For a given
product, this dynamic can lead to either a stockout or an
oversupply situation.
4. Markdowns are high for products with greater implied
demand uncertainty because oversupply often results.
Implied Uncertainty and Other
Attributes
Low Implied High Implied
Uncertainty Uncertainty

Product margin Low High

Average forecast error 10% 40% to 100%

Average stockout rate 1% to 2% 10% to 40%

Average forced season-end

0% 10% to 25%
markdown

Adapted from Marshall L Fisher. “What is the Right supply Chain for your
product?” Harvard Business Review (March – April 1997
 Impact of Supply Source Capability
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

Adapted from Hau L Lee. “Aligning supply Chain Strategies with Product
Uncertainties” California Management Review (Spring 2002)
Implied Uncertainty
(Demand and Supply) Spectrum

Impacted by life cycle position of product. New products have

higher supply uncertainty than mature products
Step 1 - Key Point

The first step in achieving strategic fit between

competitive and supply chain strategies is to
understand customers and supply chain
uncertainty.

Uncertainty from the customer and the supply

chain can be combined and mapped on the
implied uncertainty spectrum.
Step 2: Understanding Supply Chain
Capabilities
 How does the firm best meet demand?
 Supply chain responsiveness is the 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 high service level
◦ Handle supply uncertainty
Step 2: Understanding Supply Chain
Capabilities
 Responsiveness comes at a cost

 Supply chain efficiency is the inverse to the cost of

making and delivering the product to the customer

 EX: To respond to wider demand, we need to expand

capacity, increases cost

 The cost-responsiveness efficient frontier curve shows

the lowest possible cost for a given level of
responsiveness
Increases in cost lower efficiency.

For every strategic choice to increase responsiveness, there are

additional costs that lower efficiency
Cost-Responsiveness Efficient Frontier

• Lowest cost defined based

on existing technology

• Not every firm operate on

efficient frontier

• Can improve responsiveness

and become less efficient
(increase cost)

• Trade off between efficiency

and responsiveness

• Firms on efficient frontier –

continuously improving
processes, technology to
shift efficient frontier
Responsiveness Spectrum

Seven Eleven responds quickly to orders, store managers place orders for
replenishment orders less than 12 hours before they are supplied
Step 2- Key Point

The second step in achieving strategic fit

between competitive and supply chain
strategies is to understand the supply chain
and map it on the responsiveness spectrum.
Step 3: Achieving Strategic Fit

 Ensurethat the degree of supply chain

responsiveness is consistent with the
implied uncertainty

Goal – To target high responbsiveness for a supply chain facing high

implied uncertainty and efficiency for a supply chain facing low
implied uncertainty
Zone of Strategic Fit

For a high level

performance,
companies should
move their
competitive strategy
(and resulting implied
uncertainty)
and
supply chain
strategy (and resulting
responsiveness)
towards the zone of
strategic fit.
Step 3: Achieving Strategic Fit

 Assign roles to different stages of the supply chain

that ensure the appropriate level of responsiveness

 EX: IKEA – 40 countries- stylish furniture at reasonable cost – limits variety – modular –
large scale stores – decrease implied uncertainty – stock inventory (absorb uncertainty) –
supply from stock – allows replenishment orders more stable and predictable. SC passes litlle
uncertainty to manufacturer (low cost country and efficiency focus). IKEA provides
responsiveness in SC by stores absorbing most of uncertainty and being responsive,
suppliers absorbing little and being efficient.

 EX: XYZ Co manufacturer of furniture. Manufacture 1000s of furniture every week to

supply across country within 3 weeks. Retailers allow customer to choose from a wide variety
of styles and promise relatively quick delivery. High level of implied uncertainty on SC.
Retailer carries no inventory and pass most of the uncertainty to manufacturer. Retailer can
be efficient. XYZ Co. choice of uncertainty to pass to suppliers – more raw material
inventories, supplier become efficient, if it hold less inventory then supplier must become
more responsive.
Roles and Allocations
Step 3: Achieving Strategic Fit

 To achieve complete strategic fit, firms must

ensure that all functions maintain consistent
strategies that support the competitive strategy
Efficient and Responsive Supply Chains
Efficient Supply Chains Responsive Supply Chains

Primary goal Supply demand at the lowest cost Respond quickly to demand

Create modularity to allow

Product design Maximize performance at a
postponement of product
strategy minimum product cost
differentiation

Lower margins because price is a Higher margins because price is not

Pricing strategy
prime customer driver a prime customer driver

Maintain capacity flexibility to

Manufacturing
Lower costs through high utilization buffer against demand/supply
strategy
uncertainty

Inventory Maintain buffer inventory to deal

Minimize inventory to lower cost
strategy with demand/supply uncertainty

Lead-time Reduce, but not at the expense of Reduce aggressively, even if the
strategy costs costs are significant

Select based on speed, flexibility,

Supplier strategy Select based on cost and quality
reliability, and quality
Step 3- Key Point

The final step in achieving strategic fit is to

match supply chain responsiveness with the
implied uncertainty from demand and supply.
The supply chain design and all functional
strategies within the firm must also support the
supply chain’s level of responsiveness.
Tailoring the Supply Chain

 Achieve strategic fit while serving many customer segments

with a variety of products across multiple channels

 Ex: Zara sells trendy items with unpredictable demand

(responsive SC) along with basics (white T shirts) (efficient SC)

 Requires sharing some links in the supply chain with some

products, while having separate operations for other links
Responsiveness –
• use same lines, different modes for distribution
• Use regional warehouses

Tailoring – hi tech, pharma

Changes Over Product Life Cycle
 Beginning stages
1. Demand is very uncertain, and supply may be
unpredictable
2. Margins are often high, and time is crucial to
gaining sales
3. Product availability is crucial to capturing the
market
4. Cost is often a secondary consideration

Introductory phase corresponds to high implied

uncertainty, given high demand uncertainty and hence
high need of product availability
Changes Over Product Life Cycle

 Later stages
1. Demand has become more certain, and supply
is predictable
2. Margins are lower as a result of an increase in
competitive pressure
3. Price becomes a significant factor in customer
choice

Supply Chain must change

Key Point

When supplying multiple customer

segments with a wide variety of
products through several channels,
a firm must tailor its supply chain
to achieve strategic fit.
Expanding Strategic Scope
 Scope of strategic fit – the functions within the firm and stages
across the supply chain that devise an integrated strategy with
an aligned objective

 Functional area devises independent strategy to excel local

performance at the other end of the spectrum, all functional
areas devise aligned strategies for maximizing supply chain
surplus

• Intraoperation Scope: Minimize Local Cost View

◦ Each stage of the supply chain devises strategy independently
Expanding Strategic Scope
 Intrafunctional Scope: Minimizing Total
Functional Cost
◦ Firms align all operations within a function

 Interfunctional Scope: Maximize Company

Profit
◦ Functional strategies are developed to align with
one another and the competitive strategy
Expanding Strategic Scope
 Intercompany Scope: Maximize Supply Chain
Surplus
◦ Supplier and customer work together and share information
to reduce total cost and increase supply chain surplus

 Agile intercompany scope – a firm’s ability to

achieve strategic fit when partnering with supply
chain stages that change over time
Key Point

The intercompany scope of strategic fit requires firms to

evaluate every action in the context of the entire supply
chain. This broad scope increases the size of the surplus
to be shared among all stages of the sup- ply chain. The
intercompany scope of strategic fit is essential today
because the competitive playing field has shifted from
company versus company to supply chain versus supply
chain. A company’s partners in the supply chain may
well determine the company’s success, as the company
is intimately tied to its supply chain.
Challenges
 Increasing product variety and shrinking life cycles
◦ Greater product variety and shorter life cycles increase
uncertainty while reducing the window of opportunity
within which the supply chain can achieve fit

 Globalization and increasing uncertainty

◦ Significant fluctuations in exchange rates, global demand,
and the price of crude oil affecting supply chain
performance
Challenges
 Fragmentation of supply chain ownership
◦ Firms are less vertically integrated

◦ Take advantage of supplier and customer

competencies they did not have

◦ New ownership structure makes aligning and

managing the supply chain more difficult

◦ Aligning all members of a supply chain has become

critical to achieving supply chain fit
Challenges
 Changing technology and business
environment
◦ Changes in customer needs and technology may
force a firm to rethink their supply chain strategy to
maintain strategic fit

 The environment and sustainability

◦ Growing in relevance and must be accounted for
when designing supply chain strategy
◦ Opportunities may require coordination across
different members of the supply chain
Key Point

Many challenges, such as rising product

variety and shorter product life cycles,
have made it increasingly difficult for
supply chains to achieve strategic fit.
Overcoming these challenges offers a
tremendous opportunity for firms to use
supply chain management to gain
competitive advantage.
INDIAN RETAIL SECTOR
 What different models of supply chains do
you visualize emerging in the transforming
Indian retail sector?
 What trends do you see in in the emerging
Indian supply chain models that suggest
conscious attempts at achieving proper
strategic fit between business strategies
and supply chain strategies?
 How do you see the Indian retail supply
chains becoming role models for supply
chains in other sectors?
End of topic