Supply Chain Management

Chapter 2
Supply Chain Performance: Achieving Strategic Fit and Scope

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 Outline
• Competitive and supply chain strategies
• Achieving strategic fit
• Expanding strategic scope

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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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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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 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
– 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
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 How is Strategic Fit Achieved?
• Step 1: Understanding the customer and
supply chain uncertainty
• Step 2: Understanding the supply chain
• Step 3: Achieving strategic fit

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 Step 1: Understanding the Customer and
Supply Chain Uncertainty
• Identify the needs of the customer segment
being served
• Quantity of product needed in each lot
• Response time customers will tolerate
• Variety of products needed
• Service level required
• Price of the product
• Desired rate of innovation in the product
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 Step 1: Understanding the Customer and
Supply Chain Uncertainty
• Overall attribute of customer demand
• 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
• 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
– Lot size
– Response time Implied
– Service level Demand
– Product variety Uncertainty
– Price
– Innovation

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 Impact of Customer Needs on Implied
Demand Uncertainty
Customer Need
Range of quantity increases
Lead time decreases
Variety of products required
increases
Number of channels increases
Rate of innovation increases
Required service level increases
Causes implied demand
uncertainty to increase because …
Wider range of quantity implies
greater variance in demand
Less time to react to orders
Demand per product becomes more
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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 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
• Second step to achieving strategic fit is to map
the supply chain on the responsiveness
spectrum

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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

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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 (Barilla)
and responsive supply chains (Dell) .
• 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 (Table 2.4)
Efficient
Primary goal Lowest 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
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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Other Issues Affecting Strategic Fit
• Multiple products and customer segments
• Product life cycle
• Competitive changes over time

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 Multiple Products and
Customer Segments
• 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
• Two approaches:
– Different supply chains
– Tailor supply chain to best meet the needs of each
product’s demand
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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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 Competitive Changes Over Time
• Competitive pressures can change over time
• 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 a shared objective
– One extreme: each function at each stage develops its own
strategy
– Other extreme: all functions in all stages devise a strategy jointly
– how expanding the scope of strategic fit improves supply chain
performance. We represent the scope of strategic fit on a two-
dimensional grid. Horizontally, the scope of strategic fit is considered
across different supply chain stages, starting from suppliers and
moving all the way along the chain to the customer. Vertically, the
scope is applied to the fit achieved across different functional
strategies competitive, product development, supply chain, and
marketing.

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 Expanding Strategic Scope
• Categories:
– Intracompany intraoperation scope: minimize local cost view
– The most limited scope over which strategic fit is considered is one operation within a
functional area within a company.
– Intracompany intrafunctional scope: minimize functional cost
view: the scope of strategic fit expands to an entire function within a stage of the
supply chain.
– Intracompany interfunctional scope: maximize company profit view
– Companies realized the importance of expanding the scope of strategic fit across all
functions within the firm. With the intracompany interfunctional scope, the goal is to
maximize company profit. To achieve this goal, all functional strategies are developed to
support both each other and the competitive strategy.
– Intercompany interfunctional scope : maximize supply chain surplus
This occurs with the intercompany interfunctional scope, in which all stages of the supply
chain coordinate strategy across all functions, ensuring that together they best meet the
customer's needs and maximize supply chain surplus. Also Today, more and more
companies they are able to respond quickly to market needs and get the right product to
the right customer at the right time.

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 Expanding Strategic Scope
 Flexible interfunctional scope also called agile intercompany
interfunctional scope : Agile intercompany scope refers to a firm's
ability to achieve strategic fit when partnering with supply chain
stages that change over time.
 For example, a manufacturer may interface with a different set of
suppliers and distributors depending on the product being
produced and the customer being served. The strategy and
operations at firms must be agile enough to maintain strategic fit in
a changing environment.

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 Challenges to achieving and 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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