Supply Chain Management

Chapter 2 (B)
Supply Chain Performance:
Achieving Strategic Fit and Scope

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 SC Performance: Achieving
Strategic Fit and scope(outline)
 Competitive and supply chain strategies
 Achieving strategic fit
 Expanding strategic scope

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 SC performance
 When you will say that your SC performance is up to
the mark?

When you will achieve strategic fit between SC strategy

and its competitive strategy………………

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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?

Supply chain surplus is the value addition by supply chain function
of an organisation. Supply chain surplus, also known as supply chain
profitability, is a common term which represents value addition by
supply chain function of an organisation. It is calculated by the
following formula:
Supply chain surplus = Revenue generated from a customer -
Total cost incurred to produce and deliver the product.

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 What is strategy?
 The concept of strategy has been borrowed from the military and
adapted for use in business. In business, as in the military, strategy
bridges the gap between policy and tactics. 
 strategy as a way of referring to what one did to counter a
competitor’s actual or predicted moves.
 Strategy is a pattern in actions over time; for example, a company
that regularly markets very expensive products is using a "high
end" strategy.
 Strategy means deliberately choosing a different set of activities to
deliver a unique mix of value." In short, Porter argues that strategy
is about competitive position, about differentiating yourself in the
eyes of the customer, about adding value through a mix of activities
different from those used by competitors.
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 Types of Strategies
R&D
Strategy

Supply Marketin
chain g

Competitive
Strategy

Finance IT

HR
 Supply chain Strategy
Determines the nature of procurement of raw materials
and transportation of the same to and from the
company ,manufacture of the products or operation to
provide the service and distribution of the products to
the customers along with any follow up service
To achieve supply chain performance, we have to
create a strategic fit between competitive strategy and
supply chain strategy…….
 Competitive and Supply
Chain Strategies
 Competitive strategy: defines relative to its competitors, the
set of customer needs that it seeks to satisfy through its
products and services
 It is defined based on how the customer prioritizes product cost, delivery
time, variety and quality
 Product development strategy, marketing & sales strategy and how the
product will be positioned, prices and promoted
 Supply chain strategy:
 Nature of procurement raw materials,
 Transportation of materials, to and from the company,
 Manufacture of product or creation of service,
 Distribution of product
 Support services
Supply chain strategy specifies what the operations, distribution
and service functions whether performed in-house or outsourced
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 The Value Chain: Linking Supply Chain
and Business Strategy
To see the relationship between competitive strategy and supply chain strategy,
we should start with the value chain……………….

Finance, Accounting, Information Technology, Human Resources

New Marketing
Product and Operations Distribution Service
Development Sales

Value chain begins with new product development, which creates . specifications for
the product. Marketing and sales generate demand by publicizing the customer
priorities that the product and services will satisfy. Marketing also brings customer
input back to new product development.. Using new product specifications, operations
transform inputs to outputs to create the product. Distribution either takes the product
to the customer or brings the customer to the product. Service responds to customer
requests during or after the sale.

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 Value Chain………………

 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
 A supply chain strategy determines nature of procurement
raw materials, transportation of materials, to and from the company,
manufacture of product or creation of service, distribution of product
and support services

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 Achieving Strategic Fit
 Introduction
 How is strategic fit achieved?
 Other issues affecting strategic fit

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 What’s Strategic fit ?
It means that both the Business /Competitive
strategy of the company and supply chain
strategy should have the same goal .It refers
to the consistency between customer
priorities that the competitive strategy is
designed to satisfy and the supply chain
capabilities that the supply chain strategy
aims to build up .
 Achieving Strategic Fit
 Strategic fit: For any company to be successful, its
supply chain strategy and competitive strategy must
fit together…..
– 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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 Achieving Strategic Fit
 Strategic fit:
• supply chain strategy and competitive strategy must
fit together
• strategic fit means both the competitive and supply
chain strategies have aligned goal
 How is strategic fit achieved?(for a single market
segment)
• There are three basic steps to achieve this strategic fit
 Other issues affecting strategic fit( how multiple product,
multiple customer segments, product life cycle, globalisation
and growing uncertainty affect strategic fit)
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 Achieving Strategic Fit
 Supply chain achieves Strategic Fit:
 Cost - secure long term cost, i.e. thru engineering, contracts,
 service/product - are stable i.e. Internet, cable, availability of raw mtrls.
 timeliness. - upgrade patches (covers/ reinforcement), new release, reliability
supply chain
 Stability, Reliability, Predictability
 A company may fail because of a lack of strategic fit or because of its
processes and resources do not provide the capabilities to execute the
desired strategy
 Example of strategic fit – Dell
 Dell – customizable products at reasonable price, very responsive and flexible
mfg.
 sell at Wal-Mart “low prices” by reliance on low cost CM(Cut and Make)
overseas.

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Steps for strategic fit

• Know your customers

•Know your supply chain

•Achieve strategic fit

 How is Strategic Fit Achieved?
 Step 1: Understanding the customer and supply chain uncertainty
 Customer – cost and service requirements
 Uncertainty – demand/supply, disruption, delay
 Step 2: Understanding the supply chain capabilities
 What does it do well? Deliver on time, cost, flexibility
 Step 3: Achieving strategic fit
 Fix a mismatch of supply chain strengths with customer needs.
 Dell low cost computer sell at Walmart
 Cheap large $ appliance w/2 wk LT or 1 day but cost $$$$$$$$?????

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 Step 1: Understanding the Customer
and Supply Chain Uncertainty
Understanding the customer:
 Identify the needs of the customer segment being
served .(example: 7-eleven Japan and Sam’s Club)
 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
 Demand uncertainty: It reflects the uncertainty of
customer demand for a product.
Demand uncertainty: uncertainty of customer demand for a
product. Sell 2 this week, 250 next week
 Implied demand uncertainty: It is demand uncertainty
imposed on the supply chain because of the customer
needs.
Implied demand uncertainty is the resulting uncertainty for only
the portion of the demand that the supply chain plans to satisfy
based on the attributes the customer desires

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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 disaggregated
Number of channels increases Total customer demand is now
disaggregated over more channels
Rate of innovation increases New products tend to have more
uncertain demand
Required service level increases Firm now has to handle unusual
surges (rush) in demand

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 Step 2: Understanding the
Supply Chain Capabilities
 How does the firm best meet demand in uncertain
environment?
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.
 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 and handle supply uncertainty
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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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 Understanding the Supply Chain: Cost-
Responsiveness Efficient Frontier
Responsiveness
Companies are at all stages of this curve

High

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
 Examples: Dell, Barilla

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 Responsiveness Spectrum

Highly Somewhat Somewhat Highly

efficient efficient responsive responsive

Integrated Hanes Most Dell

steel mill apparel automotive
production

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 Achieve strategic fit
High

Responsiveness Zone of strategic fit

Low
Implied uncertain
Certain Uncertain demand
Demand
Demand
 Achieving Strategic Fit Shown on the
Uncertainty/Responsiveness Map (Fig. 2.5)
Responsive
IKEA has all inventory at
supply chain every store

New Products

Responsiveness e of it
n F
spectrum Zo egic
t
t ra
S Life Cycle of Pharma.
and Intel

Steel Mill
Efficient Established Product
supply chain

Certain Implied Uncertain

demand uncertainty demand
spectrum
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 Comparison of Efficient and
Responsive Supply Chains (Table 2.4)
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 if
of greater cost costs are significant
Supplier selection strategy Cost and low quality Speed, flexibility, quality
Transportation strategy Greater reliance on low cost Greater reliance on
modes responsive (fast) modes

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 Other Issues Affecting Strategic Fit
 Multiple products and customer segments
 Product life cycle
 Competitive changes over time
 Growing supply chain uncertainty
 The environment and sustainability

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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
 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 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
 Five categories:
– Intracompany intraoperation scope
– Intracompany intrafunctional scope
– Intracompany interfunctional scope
– Intercompany interfunctional scope
– Flexible interfunctional scope

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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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Obstacles to Achieving strategic
fit
• Increasing variety of products
• Fragmentation of supply chain
ownership
• Decreasing product life cycles
• Increasingly demanding customers
• Globalization
•Difficulty executing new strategies
 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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